Warner Music Group Corp. 10-K

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA WARNER MUSIC GROUP CORP. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Page Number Report s of Independent Registered Public Accounting Firm 79 Consolidated Financial Statements: Consolidated Balance Sheets as of September 30, 2021 and September 30, 2020 82 Consolidated Statements of Operations for the fiscal years ended September 30, 202 1 , September 30, 20 20 and September 30, 201 9 83 Consolidated Statements of Comprehensive Income (Loss) for the fiscal years ended September 30, 202 1 , September 30, 20 20 and September 30, 201 9 84 Consolidated Statements of Cash Flows for the fiscal years ended September 30, 202 1 , September 30, 20 20 and September 30, 201 9 85 Consolidated Statements of Equity (Deficit) for the fiscal years ended September 30, 202 1 , September 30, 20 20 and September 30, 201 9 86 Notes to Consolidated Financial Statements 87 Financial Statement Schedule: Schedule II—Valuation and Qualifying Accounts 120 78 Report of Independent Registered Public Accounting Firm To the Stockholders and Board of Directors Warner Music Group Corp.: Opinion on the Consolidated Financial Statements We have audited the accompanying consolidated balance sheets of Warner Music Group Corp. and subsidiaries (the Company) as of September 30, 2021 and September 30, 2020, the related consolidated statements of operations, comprehensive income (loss), cash flows, and equity (deficit) for each of the years in the three-year period ended September 30, 2021, and the related notes, and financial statement schedule II as listed in the accompanying index to Item 8 (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of September 30, 2021 and September 30, 2020, and the results of its operations and its cash flows for each of the years in the three-year period ended September 30, 2021, in conformity with U.S. generally accepted accounting principles. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of September 30, 2021, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated November 23, 2021 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting. Change in Accounting Principle As discussed in Note 7 to the consolidated financial statements, the Company has changed its method of accounting for leases as of October 1, 2019 due to the adoption of ASC Topic 842, Leases . Basis for Opinion These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion. 79 Critical Audit Matter The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of a critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. Sufficiency of audit evidence over Recorded Music digital revenue As discussed in Notes 2 and 4 to the consolidated financial statements, the Company generated $3,105 million of digital revenues within the Recorded Music segment, for the year ended September 30, 2021. The Company’s Recorded Music digital revenue recognition process involves several applications responsible for the initiation, processing, and recording of transactions in accordance with the Company’s accounting policy. We identified the evaluation of the sufficiency of audit evidence related to digital revenue in the Recorded Music segment as a critical audit matter. Evaluating the sufficiency of audit evidence required especially subjective auditor judgment due to the multiple information technology (IT) applications, data interfaces, and processing used for the initiation, processing, and recording of transactions, and required involvement of IT professionals with specialized skills and knowledge. The following are the primary procedures we performed to address this critical audit matter. We applied auditor judgment to determine the nature and extent of procedures to be performed over Recorded Music digital revenue. We evaluated the design and tested the operating effectiveness of certain internal controls related to Recorded Music digital revenue process. We involved IT professionals with specialized skills and knowledge, who assisted in evaluating general IT controls and application controls used in the Recorded Music digital revenue process. For a selection of Recorded Music digital revenue agreements, we read the underlying agreements and evaluated the Company’s assessment of the contract terms in accordance with revenue recognition requirements. For a sample of revenue transactions, we compared the amounts recognized to (1) underlying sales and usage statements received from customers and cash receipts, where applicable, and (2) underlying documentation, including contracts. We evaluated sales and usage statements provided by customers received after year end to assess the accuracy of revenue recorded as of September 30, 2021. For a sample of manual journal entries to Recorded Music digital revenue, which included amounts for contracts that contain non-recoupable fixed fees or minimum guarantees, we agreed amounts to underlying documentation and, where applicable, recalculated the Company’s determination of revenue recognized. In addition, we evaluated the overall sufficiency of audit evidence obtained by assessing the results of procedures performed, including appropriateness of the nature and extent of such evidence. /s/ KPMG LLP We have served as the Company’s auditor since 2015. New York, New York November 23, 2021 80 Report of Independent Registered Public Accounting Firm To the Stockholders and Board of Directors Warner Music Group Corp.: Opinion on Internal Control Over Financial Reporting We have audited Warner Music Group Corp. and subsidiaries' (the Company) internal control over financial reporting as of September 30, 2021, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of September 30, 2021, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of September 30, 2021 and 2020, the related consolidated statements of operations, comprehensive income (loss), cash flows, and equity (deficit) for each of the years in the three-year period ended September 30, 2021, and the related notes, and financial statement schedule II as listed in the accompanying index to Item 8 (collectively, the consolidated financial statements), and our report dated November 23, 2021 expressed an unqualified opinion on those consolidated financial statements. Basis for Opinion The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. Definition and Limitations of Internal Control Over Financial Reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. /s/ KPMG LLP New York, New York November 23, 2021 81 Warner Music Group Corp. Consolidated Balance Sheets September 30, 2021 September 30, 2020 (in millions, except share data) Assets Current assets: Cash and equivalents $ 499 $ 553 Accounts receivable, net of allowances of $ 20 million and $ 23 million 839 771 Inventories 99 79 Royalty advances expected to be recouped within one year 373 220 Prepaid and other current assets 86 55 Total current assets 1,896 1,678 Royalty advances expected to be recouped after one year 457 269 Property, plant and equipment, net 364 331 Operating lease right-of-use assets, net 268 273 Goodwill 1,830 1,831 Intangible assets subject to amortization, net 2,017 1,653 Intangible assets not subject to amortization 154 154 Deferred tax assets, net 31 68 Other assets 194 153 Total assets $ 7,211 $ 6,410 Liabilities and Equity (Deficit) Current liabilities: Accounts payable $ 302 $ 264 Accrued royalties 1,880 1,628 Accrued liabilities 461 382 Accrued interest 14 30 Operating lease liabilities, current 43 39 Deferred revenue 348 297 Other current liabilities 102 80 Total current liabilities 3,150 2,720 Long-term debt 3,346 3,104 Operating lease liabilities, noncurrent 287 299 Deferred tax liabilities, net 207 163 Other noncurrent liabilities 175 169 Total liabilities $ 7,165 $ 6,455 Equity (deficit): Class A common stock, $ 0.001 par value; 1,000,000,000 shares authorized, 122,414,827 and 88,578,361 shares issued and outstanding as of September 30, 2021 and September 30, 2020, respectively $ — $ — Class B common stock, $ 0.001 par value; 1,000,000,000 shares authorized, 391,970,996 and 421,450,000 issued and outstanding as of September 30, 2021 and September 30, 2020, respectively 1 1 Additional paid-in capital 1,942 1,907 Accumulated deficit ( 1,710 ) ( 1,749 ) Accumulated other comprehensive loss, net ( 202 ) ( 222 ) Total Warner Music Group Corp. equity (deficit) 31 ( 63 ) Noncontrolling interest 15 18 Total equity (deficit) 46 ( 45 ) Total liabilities and equity (deficit) $ 7,211 $ 6,410 See accompanying notes 82 Warner Music Group Corp. Consolidated Statements of Operations Fiscal Year Ended September 30, 2021 2020 2019 (in millions, except share and per share data) Revenue $ 5,301 $ 4,463 $ 4,475 Costs and expenses: Cost of revenue ( 2,742 ) ( 2,333 ) ( 2,401 ) Selling, general and administrative expenses (a) ( 1,721 ) ( 2,169 ) ( 1,510 ) Amortization expense ( 229 ) ( 190 ) ( 208 ) Total costs and expenses ( 4,692 ) ( 4,692 ) ( 4,119 ) Operating income (loss) 609 ( 229 ) 356 Loss on extinguishment of debt ( 22 ) ( 34 ) ( 7 ) Interest expense, net ( 122 ) ( 127 ) ( 142 ) Other (expense) income ( 9 ) ( 57 ) 60 Income (loss) before income taxes 456 ( 447 ) 267 Income tax expense ( 149 ) ( 23 ) ( 9 ) Net income (loss) 307 ( 470 ) 258 Less: Income attributable to noncontrolling interest ( 3 ) ( 5 ) ( 2 ) Net income (loss) attributable to Warner Music Group Corp. $ 304 $ ( 475 ) $ 256 Net income (loss) per share attributable to common stockholders: Class A – Basic and Diluted $ 0.58 $ ( 0.82 ) $ — Class B – Basic and Diluted $ 0.58 $ ( 0.95 ) $ 0.51 Weighted average common shares: Class A – Basic and Diluted 110,560,517 26,897,115 — Class B – Basic and Diluted 402,911,743 477,624,846 501,991,944 (a) Includes depreciation expense: $ ( 77 ) $ ( 71 ) $ ( 61 ) See accompanying notes 83 Warner Music Group Corp. Consolidated Statements of Comprehensive Income (Loss) Fiscal Year Ended September 30, 2021 2020 2019 (in millions) Net income (loss) $ 307 $ ( 470 ) $ 258 Other comprehensive income (loss), net of tax: Foreign currency adjustment 7 37 ( 34 ) Deferred gain (loss) on derivative financial instruments 12 ( 21 ) ( 11 ) Minimum pension liability 1 2 ( 5 ) Other comprehensive income (loss), net of tax 20 18 ( 50 ) Total comprehensive income (loss) 327 ( 452 ) 208 Less: Income attributable to noncontrolling interest ( 3 ) ( 5 ) ( 2 ) Comprehensive income (loss) attributable to Warner Music Group Corp. $ 324 $ ( 457 ) $ 206 See accompanying notes 84 Warner Music Group Corp. Consolidated Statements of Cash Flows Fiscal Year Ended September 30, 2021 2020 2019 (in millions) Cash flows from operating activities Net income (loss) $ 307 $ ( 470 ) $ 258 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization 306 261 269 Unrealized losses (gains) and remeasurement of foreign-denominated loans and foreign currency forward exchange contracts 3 54 ( 28 ) Deferred income taxes 27 ( 57 ) ( 68 ) Loss on extinguishment of debt 22 34 7 Net (gain) loss on divestitures and investments 4 ( 2 ) ( 20 ) Non-cash interest expense 5 5 6 Non-cash stock-based compensation expense 45 608 50 Changes in operating assets and liabilities: Accounts receivable, net ( 58 ) 18 ( 90 ) Inventories ( 19 ) ( 2 ) 3 Royalty advances ( 332 ) ( 108 ) ( 110 ) Accounts payable and accrued liabilities 91 ( 32 ) 3 Royalty payables 217 36 130 Accrued interest ( 16 ) ( 4 ) 3 Operating lease liabilities ( 3 ) ( 3 ) — Deferred revenue 47 114 ( 4 ) Other balance sheet changes ( 8 ) 11 ( 9 ) Net cash provided by operating activities 638 463 400 Cash flows from investing activities Acquisition of music publishing rights and music catalogs, net ( 481 ) ( 40 ) ( 41 ) Capital expenditures ( 93 ) ( 85 ) ( 104 ) Investments and acquisitions of businesses, net of cash received ( 64 ) ( 94 ) ( 231 ) Net cash used in investing activities ( 638 ) ( 219 ) ( 376 ) Cash flows from financing activities Proceeds from issuance of 3.000 % Senior Secured Notes due 2031 244 550 — Proceeds from increase supplement to Senior Term Loan Facility 325 — — Proceeds from issuance of 2.250 % Senior Secured Notes due 2031 524 — — Redemption of 5.500 % Senior Notes due 2026 ( 325 ) — — Redemption of 3.625 % Senior Secured Notes due 2026 ( 524 ) — — Proceeds from issuance of 3.875 % Senior Secured Notes due 2030 — 535 — Proceeds from issuance of 2.750 % Senior Secured Notes due 2028 — 365 — Repayment of 5.000 % Senior Secured Notes due 2023 — ( 300 ) — Repayment of 4.875 % Senior Secured Notes due 2024 — ( 220 ) — Repayment of 4.125 % Senior Secured Notes due 2024 — ( 349 ) — Partial repayment of Senior Term Loan Facility due 2023 — ( 506 ) — Proceeds from issuance of Acquisition Corp. 3.625 % Senior Secured Notes — — 514 Repayment of Acquisition Corp. 4.125 % Senior Secured Notes — — ( 40 ) Repayment of Acquisition Corp. 4.875 % Senior Secured Notes — — ( 30 ) Repayment of Acquisition Corp. 5.625 % Senior Secured Notes — — ( 247 ) Deferred financing costs paid ( 12 ) ( 17 ) ( 7 ) Call premiums paid on early redemption of debt ( 21 ) ( 23 ) ( 5 ) Distribution to noncontrolling interest holders ( 7 ) ( 7 ) ( 3 ) Dividends paid ( 265 ) ( 344 ) ( 94 ) Net cash (used in) provided by financing activities ( 61 ) ( 316 ) 88 Effect of exchange rate changes on cash and equivalents 7 6 ( 7 ) Net (decrease) increase in cash and equivalents ( 54 ) ( 66 ) 105 Cash and equivalents at beginning of period 553 619 514 Cash and equivalents at end of period $ 499 $ 553 $ 619 See accompanying notes 85 Warner Music Group Corp. Consolidated Statements of Equity (Deficit) Class A Common Stock Class B Common Stock Additional Paid-in Capital Accumulated Deficit Accumulated Other Comprehensive Loss Total Warner Music Group Corp. Equity (Deficit) Non-controlling Interest Total Equity (Deficit) Shares Value Shares Value (in millions, except share and per share data) Balances at September 30, 2018 — $ — 501,991,944 $ 1 $ 1,127 $ ( 1,272 ) $ ( 190 ) $ ( 334 ) $ 14 $ ( 320 ) Cumulative effect of ASC 606 adoption — — — — — 139 — 139 11 150 Net income — — — — — 256 — 256 2 258 Other comprehensive loss, net of tax — — — — — — ( 50 ) ( 50 ) — ( 50 ) Dividends ($ 0.59 per Class B share) — — — — — ( 300 ) — ( 300 ) — ( 300 ) Distribution to noncontrolling interest holders — — — — — — — — ( 3 ) ( 3 ) Other — — 3,838,078 — — — — — ( 4 ) ( 4 ) Balances at September 30, 2019 — $ — 505,830,022 $ 1 $ 1,127 $ ( 1,177 ) $ ( 240 ) $ ( 289 ) $ 20 $ ( 269 ) Cumulative effect of ASC 842 adoption — — — — — 7 — 7 — 7 Net loss — — — — — ( 475 ) — ( 475 ) 5 ( 470 ) Other comprehensive loss, net of tax — — — — — — 18 18 — 18 Dividends ($ 0.12 per Class A share and $ 0.27 per Class B share) — — — — — ( 137 ) — ( 137 ) — ( 137 ) Stock-based compensation expense — — — — 11 — — 11 — 11 Distribution to noncontrolling interest holders — — — — — — — — ( 7 ) ( 7 ) Cumulative effect of ASC 718 accounting policy change — — — — — 33 — 33 — 33 Modification of stock-based compensation plan — — — — 769 — — 769 — 769 Shares listed through IPO 88,550,000 — ( 88,550,000 ) — — — — — — — Shares issued under Omnibus Incentive Plan 28,361 — — — — — — — — — Other — — 4,169,978 — — — — — — — Balances at September 30, 2020 88,578,361 $ — 421,450,000 $ 1 $ 1,907 $ ( 1,749 ) $ ( 222 ) $ ( 63 ) $ 18 $ ( 45 ) Net income — — — — — 304 — 304 3 307 Other comprehensive income, net of tax — — — — — — 20 20 — 20 Dividends ($ 0.51 per share) — — — — — ( 265 ) — ( 265 ) — ( 265 ) Stock-based compensation expense — — — — 35 — — 35 — 35 Distribution to noncontrolling interest holders — — — — — — — — ( 7 ) ( 7 ) Exchange of Class B shares for Class A shares 19,234,103 — ( 19,234,106 ) — — — — — — — Shares issued under the Plan 4,321,259 — — — — — — — — — Conversion of Class B shares 10,244,898 — ( 10,244,898 ) — — — — — — — Shares issued under Omnibus Incentive Plan 36,206 — — — — — — — — — Other — — — — — — — — 1 1 Balances at September 30, 2021 122,414,827 $ — 391,970,996 $ 1 $ 1,942 $ ( 1,710 ) $ ( 202 ) $ 31 $ 15 $ 46 See accompanying notes 86 Warner Music Group Corp. Notes to Consolidated Financial Statements 1. Description of Business Warner Music Group Corp. (the “Company”) was formed on November 21, 2003. The Company is the direct parent of WMG Holdings Corp. (“Holdings”), which is the direct parent of WMG Acquisition Corp. (“Acquisition Corp.”). Acquisition Corp. is one of the world’s major music entertainment companies. Initial Public Offering On June 5, 2020, the Company completed an initial public offering (“IPO”) of Class A common stock of the Company, par value $ 0.001 per share (“Class A Common Stock”). The Company listed these shares on the NASDAQ stock market under the ticker symbol “WMG.” The offering consisted entirely of secondary shares sold by Access Industries, LLC (collectively with its affiliates, “Access”) and certain related selling stockholders. Following the completion of the IPO, Access and its affiliates continue to hold all of the Class B common stock of the Company, par value $ 0.001 per share (“Class B Common Stock”), representing approximately 98 % of the total combined voting power of the Company’s outstanding common stock and approximately 76 % of the economic interest. As a result, the Company is a “controlled company” within the meaning of the corporate governance standards of NASDAQ. See Item 1A. Risk Factors — Risks Related to Our Controlling Stockholder. Recorded Music Operations Our Recorded Music business primarily consists of the discovery and development of recording artists and the related marketing, promotion, distribution, sale and licensing of music created by such recording artists. We play an integral role in virtually all aspects of the recorded music value chain from discovering and developing talent to producing, distributing and selling music to marketing and promoting recording artists and their music. Music Publishing Operations While Recorded Music is focused on marketing, promoting, distributing and licensing a particular recording of a musical composition, Music Publishing is an intellectual property business focused on generating revenue from uses of the musical composition itself. In return for promoting, placing, marketing and administering the creative output of a songwriter, or engaging in those activities for other rightsholders, our Music Publishing business shares the revenues generated from use of the musical compositions with the songwriter or other rightsholders. 2. Summary of Significant Accounting Policies Basis of Presentation The accompanying consolidated financial statements have been prepared in accordance with United States generally accepted accounting principles (“U.S. GAAP”). In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. The Company maintains a 52-53 week fiscal year ending on the last Friday in each reporting period. The fiscal year ended September 30, 2021 ended on September 24, 2021, the fiscal year ended September 30, 2020 ended on September 25, 2020 and the fiscal year ended September 30, 2019 ended on September 27, 2019. For convenience purposes, the Company continues to date its financial statements as of September 30. Basis of Consolidation The accompanying financial statements present the consolidated accounts of all entities in which the Company has a controlling voting interest and/or variable interest required to be consolidated in accordance with U.S. GAAP. All intercompany balances and transactions have been eliminated. 87 Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 810, Consolidation (“ASC 810”) requires the Company first evaluate its investments to determine if any investments qualify as a variable interest entity (“VIE”). A VIE is consolidated if the Company is deemed to be the primary beneficiary of the VIE, which is the party involved with the VIE that has both (i) the power to control the most significant activities of the VIE and (ii) either the obligation to absorb losses or the right to receive benefits that could potentially be significant to the VIE. If an entity is not deemed to be a VIE, the Company consolidates the entity if the Company has a controlling voting interest. The Company has performed a review of all subsequent events through the date the financial statements were issued and has determined that no additional disclosures are necessary. Common Stock On February 28, 2020, the Company amended its certificate of incorporation to increase its authorized capital stock to 2,100,000,000 shares, consisting of 1,000,000,000 shares of Class A Common Stock, 1,000,000,000 shares of Class B Common Stock, and 100,000,000 shares of preferred stock, par value $ 1.00 per share. In addition, the February 28, 2020 amendment to the Company’s certificate of incorporation also gave effect to the reclassification and 477,242.614671815 -for-1 stock split of the Company’s existing common stock outstanding into 510,000,000 shares of Class B Common Stock. This stock split has been retrospectively presented throughout the financial statements. Upon completion of the IPO and the exercise in full of the underwriters’ option to purchase additional shares, 88,550,000 shares of Class A Common Stock, 421,450,000 shares of Class B Common Stock and no shares of preferred stock were outstanding. During the fiscal year ended September 30, 2021, Access converted 10,244,898 shares of Class B Common Stock to the same number of shares of Class A Common Stock, which it subsequently sold through open market sales, which is reflected as a conversion of Class B Common Stock for Class A Common Stock in the consolidated statements of equity. Earnings per Share The consolidated statements of operations present basic and diluted earnings per share (“EPS”). Prior to the completion of the IPO, basic and diluted earnings per share were computed by dividing net income available to common stockholders by the weighted average number of outstanding common shares less shares issued for the exercise of the deferred equity units since these units were mandatorily redeemable in cash. As such, the deferred equity units were excluded from the denominator of the basic and diluted EPS calculation prior to the IPO completion. Subsequent to the completion of the IPO, the Company utilizes the two-class method to report earnings per share. The two-class method is an earnings allocation formula that determines earnings per share for each class of common stock according to dividends declared and participation rights in undistributed earnings. Undistributed earnings allocated to participating securities are subtracted from net income in determining net income attributable to common stockholders. See also Note 3, Earnings Per Share. Use of Estimates The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and the accompanying notes. Actual results could differ from those estimates. Business Combinations The Company accounts for its business acquisitions under the FASB ASC Topic 805, Business Combinations (“ASC 805”) guidance for business combinations. The total cost of acquisitions is allocated to the underlying identifiable net assets based on their respective estimated fair values. The excess of the purchase price over the estimated fair values of the net assets acquired is recorded as goodwill. Determining the fair value of assets acquired and liabilities assumed requires management’s judgment and often involves the use of significant estimates and assumptions, including assumptions with respect to future cash inflows and outflows, discount rates, asset lives and market multiples, among other items. Cash and Equivalents The Company considers all highly liquid investments with maturities of three months or less at the date of purchase to be cash equivalents. The Company includes checks outstanding at year end as a component of accounts payable, instead of a reduction in its cash balance where there is not a right of offset in the related bank accounts. 88 Accounts Receivable Credit is extended to customers based upon an evaluation of the customer’s financial condition. Accounts receivable are recorded at net realizable value. Refund Liabilities and Allowance for Doubtful Accounts Management’s estimate of Recorded Music physical products that will be returned, and the amount of receivables that will ultimately be collected is an area of judgment affecting reported revenues and operating income. In determining the estimate of physical product sales that will be returned, management analyzes vendor sales of product, historical return trends, current economic conditions, changes in customer demand and commercial acceptance of the Company’s products. Based on this information, management reserves a percentage of each dollar of physical product sales that provide the customer with the right of return. The provision for such sales returns is reflected as a reduction in the revenues from the related sale. Similarly, the Company monitors customer credit risk related to accounts receivable. Significant judgments and estimates are involved in evaluating if such amounts will ultimately be fully collected. On an ongoing basis, the Company tracks customer exposure based on news reports, ratings agency information, reviews of customer financial data and direct dialogue with customers. Counterparties that are determined to be of a higher risk are evaluated to assess whether the payment terms previously granted to them should be modified. The Company also monitors payment levels from customers, and a provision for estimated uncollectible amounts is maintained based on such payment levels, historical experience, management’s views on trends in the overall receivable agings and, for larger accounts, analyses of specific risks on a customer-specific basis. Concentration of Credit Risk Customer credit risk represents the potential for financial loss if a customer is unwilling or unable to meet its agreed upon contractual payment obligations. As of September 30, 2021 and September 30, 2020, Spotify represented 18 % and 16 %, respectively, of the Company’s accounts receivable balance. No other single customer accounted for more than 10% of accounts receivable in either period. The Company, by policy, routinely assesses the financial strength of its customers. As such, the Company does not believe there is any significant collection risk. In the Music Publishing business, the Company collects a significant portion of its royalties from copyright collecting societies around the world. Collecting societies and associations generally are not-for-profit organizations that represent composers, songwriters and music publishers. These organizations seek to protect the rights of their members by licensing, collecting license fees and distributing royalties for the use of the members’ works. Accordingly, the Company does not believe there is any significant collection risk from such societies. Inventories Inventories consist of merchandise, vinyl, CDs, DVDs and other related music products. Inventories are stated at the lower of cost or estimated realizable value. Cost is determined using first-in, first-out (“FIFO”) and average cost methods, which approximate cost under the FIFO method. Returned goods included in inventory are valued at estimated realizable value, but not in excess of cost. Derivative and Financial Instruments The Company accounts for these investments as required by the FASB ASC Topic 815, Derivatives and Hedging (“ASC 815”), which requires that all derivative instruments be recognized on the balance sheet at fair value. ASC 815 also provides that, for derivative instruments that qualify for hedge accounting, changes in the fair value are either (a) offset against the change in fair value of the hedged assets, liabilities or firm commitments through earnings or (b) recognized in equity until the hedged item is recognized in earnings, depending on whether the derivative is being used to hedge changes in fair value or cash flows. In addition, the ineffective portion of a derivative’s change in fair value is immediately recognized in earnings. The carrying value of the Company’s financial instruments approximates fair value, except for certain differences relating to long-term, fixed-rate debt (see Note 18) and other financial instruments that are not significant. The fair value of financial instruments is generally determined by reference to market values resulting from trading on a national securities exchange or an over-the-counter market. In cases where quoted market prices are not available, fair value is based on estimates using present value or other valuation techniques. 89 Property, Plant and Equipment Property, plant and equipment acquired in conjunction with business combinations are recorded at fair value. All other additions are recorded at historical cost. Depreciation is calculated using the straight-line method based upon the estimated useful lives of depreciable assets commencing at the date assets are placed in service as follows: five to seven years for furniture and fixtures, periods of up to five years for computer equipment and software and periods of up to thirteen years for machinery and equipment. Buildings are depreciated over periods of up to forty years . Leasehold improvements are depreciated over the life of the lease or estimated useful lives of the improvements, whichever period is shorter. The Company accounts for costs incurred to develop or purchase computer software for internal use in accordance with FASB ASC Subtopic 350-40, Internal-Use Software (“ASC 350-40”). As required by ASC 350-40, the Company capitalizes the costs incurred during the application development stage, which include costs to design the software configuration and interfaces, coding, installation, and testing. Accounting for Goodwill and Other Intangible Assets In accordance with FASB ASC Topic 350, Intangibles—Goodwill and Other (“ASC 350”), the Company accounts for business combinations using the acquisition method of accounting and accordingly, the assets and liabilities of the acquired entities are recorded at their estimated fair values at the acquisition date. Goodwill represents the excess of the purchase price over the fair value of net assets, including the amount assigned to identifiable intangible assets. Pursuant to this guidance, the Company does not amortize the goodwill balance and instead, performs an annual impairment test to assess the fair value of goodwill over its carrying value. Identifiable intangible assets with finite lives are amortized over their useful lives. Goodwill is tested annually for impairment on July 1 and at any time upon occurrence of certain events or changes in circumstances. ASC 350 gives an entity the option to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit or intangible asset is less than its carrying amount. If an entity determines it is not more likely than not that the fair value of a reporting unit or intangible asset is less than its carrying amount, then performing the quantitative impairment test is unnecessary. However, if an entity concludes otherwise, then the quantitative impairment test shall be used to identify the impairment and measure the amount of an impairment loss to be recognized (if applicable). The Company performs an annual impairment test of its indefinite-lived intangible assets as of July 1 of each fiscal year, unless events occur which trigger the need for an earlier impairment test. The Company has the option to perform a qualitative assessment to determine if an impairment is more likely than not to have occurred. In the qualitative assessment, the Company must evaluate the totality of qualitative factors, including any recent fair value measurements, that impact whether an indefinite-lived intangible asset other than goodwill has a carrying amount that more likely than not exceeds its fair value. The Company must proceed to conduct a quantitative analysis if the Company (i) determines that such an impairment is more likely than not to exist or (ii) forgoes the qualitative assessment entirely. The impairment tests require management to make assumptions about future conditions impacting the value of the indefinite-lived intangible assets, including projected growth rates, cost of capital, effective tax rates, tax amortization periods, royalty rates, market share and others. Valuation of Long-Lived Assets The Company periodically reviews the carrying value of its long-lived assets, including finite-lived intangibles, property, plant and equipment and amortizable intangible assets, whenever events or changes in circumstances indicate that the carrying value may not be recoverable or that the lives assigned may no longer be appropriate. To the extent the estimated future cash inflows attributable to the asset, less estimated future cash outflows, are less than the carrying amount, an impairment loss is recognized in an amount equal to the difference between the carrying value of such asset and its fair value. Assets to be disposed of and for which there is a committed plan to dispose of the assets, whether through sale or abandonment, are reported at the lower of carrying value or fair value less costs to sell. If it is determined that events and circumstances warrant a revision to the remaining period of amortization, an asset’s remaining useful life would be changed, and the remaining carrying amount of the asset would be amortized prospectively over that revised remaining useful life. Foreign Currency Translation The financial position and operating results of substantially all foreign operations are consolidated using the local currency as the functional currency. Local currency assets and liabilities are translated at the rates of exchange on the balance sheet date, and local currency revenues and expenses are translated at average rates of exchange during the period. Resulting translation gains or losses are included in the accompanying consolidated statements of equity (deficit) as a component of accumulated other comprehensive loss. 90 Revenues Recorded Music As required by FASB ASC Topic 606, Revenue from Contracts with Customers (“ASC 606”), the Company recognizes revenue when, or as, control of the promised services or goods is transferred to our customers and in an amount that reflects the consideration the Company is contractually due in exchange for those services or goods. The Company’s revenue recognition process involves several applications that are responsible for the initiation and processing of transactions in order to recognize revenue in accordance with the Company’s policy and ASC 606. Revenues from the sale or license of Recorded Music products through digital distribution channels are typically recognized when sale or usage occurs based on usage reports received from the customer. These licenses typically contain a single performance obligation, which is ongoing access to all intellectual property in an evolving content library, predicated on: (1) the business practice and contractual ability to remove specific content without a requirement to replace the content and without impact to minimum royalty guarantees and (2) the contracts not containing a specific listing of content subject to the license. For certain licenses where the consideration is fixed and the intellectual property being licensed is static, revenue is recognized at the point in time when control of the licensed content is transferred to the customer. Certain contracts contain minimum guarantees, which are recoupable against royalties. Upon contract inception, the Company will assess whether a shortfall or breakage is expected (i.e., where the minimum guarantee will not be recouped through royalties) in order to determine timing of revenue recognition for the minimum guarantee. For fixed fee contracts and minimum guarantee contracts where breakage is expected, the total transaction price (fixed fee or minimum guarantee) is recognized using an appropriate measure of progress over the contractual term. The Company updates its assessment of the transaction price each reporting period to see if anticipated royalty earnings exceed the minimum guarantee. For contracts where breakage is not expected, royalties are recognized as revenue as sales or usage occurs based upon the licensee’s usage reports and, when these reports are not available, revenue is based on historical data, industry information and other relevant trends. Music Publishing Music Publishing revenues are earned from the receipt of royalties relating to the licensing of rights in musical compositions and the sale of published sheet music and songbooks. The receipt of royalties principally relates to amounts earned from the public performance of musical compositions, the mechanical reproduction of musical compositions on recorded media, including digital formats and the use of musical compositions in synchronization with visual images. Music publishing royalties, except for synchronization royalties, generally are recognized when the sale or usage occurs. The most common form of consideration for publishing contracts is sales- and usage-based royalties. The collecting societies submit usage reports, typically with payment for royalties due, often on a quarterly or biannual reporting period, in arrears. Royalties are recognized as the sale or usage occurs based upon usage reports and, when these reports are not available, royalties are estimated based on historical data, such as recent royalties reported, company-specific information with respect to changes in repertoire, industry information and other relevant trends. Synchronization revenue is typically recognized as revenue when control of the license is transferred to the customer in accordance with ASC 606. See also Note 4, Revenue Recognition. Royalty Costs and Royalty Advances The Company incurs royalty costs that are payable to our recording artists and songwriters generated from the sale or license of our Recorded Music catalog and Music Publishing copyrights. Royalties are calculated using negotiated rates in accordance with recording artist and songwriter contracts. Calculations are based on revenue earned or usage measures or a combination of these. There are instances where such data is not available to be processed and royalty cost calculations may be complex or involve judgments about significant volumes of data to be processed. In many instances, the Company commits to pay our recording artists and songwriters royalties in advance of future sales. The Company accounts for these advances under the related guidance in FASB ASC Topic 928, Entertainment—Music (“ASC 928”). Under ASC 928, the Company capitalizes as assets certain advances that it believes are recoverable from future royalties to be earned by the recording artist or songwriter. Recoverability is assessed upon initial commitment of the advance based upon the Company’s forecast of anticipated revenue from the sale of future and existing albums or musical compositions. In determining whether the advance is recoverable, the Company evaluates the current and past popularity of the recording artist or songwriter, the sales history of the recording artist or songwriter, the initial or expected commercial acceptability of the product, the current and past popularity of the genre of music that the product is designed to appeal to, and other relevant factors. Advances vary in both amount and expected life based on the underlying recording artist or songwriter. To the extent that a portion of an outstanding advance is no longer deemed recoverable, that amount will be expensed in the period the determination is made. 91 Advertising As required by the FASB ASC Subtopic 720-35, Advertising Costs (“ASC 720-35”), advertising costs are expensed as incurred. Advertising expense amounted to approximately $ 149 million, $ 115 million and $ 108 million for the fiscal years ended September 30, 2021, September 30, 2020 and September 30, 2019, respectively. Deferred advertising costs, which principally relate to advertisements that have been paid for but not been exhibited or services that have not been received, were not material for all periods presented. Stock-Based Compensation The Company accounts for stock-based payments in accordance with ASC 718, Compensation—Stock Compensation (“ASC 718”). Stock-based compensation consists primarily of restricted stock units (“RSUs”) granted to eligible employees and executives under the Omnibus Incentive Plan. The Company measures compensation expense for RSUs based on the fair value of the award on the date of grant. The grant date fair value is based on the closing market price of the Company’s Class A Common Stock on the date of grant. The Company accounts for forfeitures as they occur. Stock-based compensation is recognized on a straight-line basis over the requisite service period, which is generally four years except for certain one-year awards issued in connection with the IPO. The Company also grants unvested restricted stock to the Company’s directors. The Company recognizes stock-based compensation expense equal to the grant date fair value of the restricted stock, based on the closing stock price on grant date, on a straight-line basis over the requisite service period of the awards, which is generally one year. The Company also recognizes stock-based compensation under the Second Amended and Restated Warner Music Group Corp. Senior Management Free Cash Flow Plan (the “Plan”). The awards outstanding under the Plan are equity-classified. Prior to the Company’s IPO in June 2020, these awards were liability-classified under the recognition provision of ASC 718 and were re-measured at each reporting date until settlement. Under the provision of ASC 718, the Company determined the Plan was modified as of June 3, 2020, and as such, converted the awards from liability-classified to equity-classified. Prior to conversion, the Company performed a final measurement of its stock-based compensation liability under the fair value method. Subsequent to the amendment, the awards issued under the Plan will no longer be adjusted for changes in the value of the Company’s common stock. Upon modification of the Plan, the Company reclassified a $ 769 million stock-based compensation liability to additional paid-in capital, which included $ 57 million associated with the awards settled through the IPO tag-along right on June 5, 2020. In addition, the Company recognized approximately $ 11 million of stock-based compensation expense under the Plan for the period of June 3, 2020 through September 30, 2020 for the unvested share awards that were granted prior to the IPO, which is included in additional paid-in capital. The Company will continue to incur non-cash stock-based compensation expense for awards that were unvested as of the modification date of the Plan. Income Taxes Income taxes are provided using the asset and liability method presented by FASB ASC Topic 740, Income Taxes (“ASC 740”). Under this method, income taxes (i.e., deferred tax assets, deferred tax liabilities, taxes currently payable/refunds receivable and tax expense) are recorded based on amounts refundable or payable in the current fiscal year and include the results of any differences between U.S. GAAP and tax reporting. Deferred income taxes reflect the tax effect of net operating loss, capital loss and general business credit carryforwards and the net tax effects of temporary differences between the carrying amount of assets and liabilities for financial statements and income tax purposes, as determined under enacted tax laws and rates. Valuation allowances are established when management determines that it is more likely than not that some portion or the entire deferred tax asset will not be realized. The financial effect of changes in tax laws or rates is accounted for in the period of enactment. On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”). In accordance with ASC 740, the Company recorded the impacts in the period of enactment. From time to time, the Company engages in transactions in which the tax consequences may be subject to uncertainty. Significant judgment is required in assessing and estimating the tax consequences of these transactions. The Company prepares and files tax returns based on its interpretation of tax laws and regulations. In the normal course of business, the Company’s tax returns are subject to examination by various taxing authorities. Such examinations may result in future tax and interest assessments by these taxing authorities. In determining the Company’s tax provision for financial reporting purposes, the Company establishes a reserve for uncertain tax positions, unless such positions are determined to be more likely than not of being sustained upon examination based on their technical merits. There is considerable judgment involved in determining whether positions taken on the Company’s tax returns are more likely than not of being sustained. 92 New Accounting Pronouncements Recently Adopted Accounting Pronouncements In June 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses: Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”). ASU 2016-13 requires that expected credit losses relating to financial assets measured on an amortized cost basis and available-for-sale debt securities be recorded through an allowance for credit losses. ASU 2016-13 limits the amount of credit losses to be recognized for available-for-sale debt securities to the amount by which carrying value exceeds fair value and also requires the reversal of previously recognized credit losses if fair value increases. The Company adopted ASU 2016-13 in the first quarter of fiscal 2021 and this adoption did not have a material impact on the Company’s consolidated financial statements. Accounting Pronouncements Not Yet Adopted In December 2019, the FASB issued ASU 2019-12, Simplifying the Accounting for Income Taxes (“ASU 2019-12”). This ASU eliminates certain exceptions to the general principles in ASC 740, Income Taxes. Specifically, it eliminates the exception to (1) the incremental approach for intraperiod tax allocation when there is a loss from continuing operations, and income or a gain from other items; (2) the requirement to recognize a deferred tax liability for equity method investments when a foreign subsidiary becomes an equity method investment; (3) the ability not to recognize a deferred tax liability for a foreign subsidiary when a foreign equity method investment becomes a subsidiary; and (4) the general methodology for calculating income taxes in an interim period when a year-to-date loss exceeds the anticipated loss for the year. ASU 2019-12 also simplifies U.S. GAAP by making other changes. ASU 2019-12 will be effective for the annual periods beginning after December 15, 2020, and for interim periods beginning after December 15, 2021. Earlier adoption is permitted. The Company will adopt ASU 2019-12 beginning October 1, 2021 and this adoption is not expected to have a material impact on the Company’s financial statements. In August 2020, the FASB issued ASU 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity's Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity (“ASU 2020-06”). This ASU simplifies the accounting for convertible instruments by eliminating the cash conversion and beneficial conversion feature models used to separately account for embedded conversion features as a component of equity. Instead, the entity will account for the convertible debt or convertible preferred stock securities as a single unit of account, unless the conversion feature requires bifurcation and recognition as derivatives. Additionally, the guidance requires entities to use the if-converted method for all convertible instruments in the diluted earnings per share calculation and include the effect of potential share settlement for instruments that may be settled in cash or shares. ASU 2020-06 will be effective for the interim and annual periods beginning after December 15, 2021. Earlier adoption is permitted for periods beginning after December 15, 2020. The Company will adopt ASU 2020-06 beginning October 1, 2021, and is evaluating the impact of the adoption of this standard on its financial statements. 3. Earnings per Share The Company utilizes the two-class method to report earnings per share. Basic earnings per share is computed by dividing net income available to each class of stock by the weighted average number of outstanding common shares for each class of stock. Diluted earnings per share is computed by dividing net income available to each class of stock by the weighted average number of outstanding common shares, plus dilutive potential common shares, which is calculated using the treasury-stock method. Under the treasury-stock method, potential common shares are excluded from the computation of EPS in periods in which they have an anti-dilutive effect. For the fiscal year ended September 30, 2020, the potentially dilutive common shares were excluded from the Class A Common Stock diluted loss per share calculation since their effects would have been anti-dilutive due to the net loss attributable to Class A Common Stock for the period. The potentially dilutive common shares did not have a dilutive effect on the Company’s EPS calculation for the fiscal year ended September 30, 2021. The Company did not have any dilutive securities for the fiscal year ended September 30, 2019. In computing earnings per share subsequent to the completion of our IPO, the Company allocates dividends declared to Class A Common Stock and Class B Common Stock based on timing and amounts actually declared for each class of stock and the undistributed earnings are allocated to Class A Common Stock and Class B Common Stock pro rata on a basic weighted average shares outstanding basis since the two classes of stock participate equally on a per share basis upon liquidation. Prior to the completion of the IPO in fiscal 2020, the Company declared dividends totaling $ 75 million which were allocated solely to Class B Common Stock as there was no outstanding Class A Common Stock at the time these dividends were declared. While Class A and Class B Common Stock have the same dividend rights, the allocation of all dividends declared prior to the IPO to Class B Common Stock resulted in a different loss per share for the two classes of common stock for the fiscal year ended September 30, 2020. Subsequent to the completion of the IPO, and modification of our stock-based compensation awards as described in Note 12, the Class B Common Stock issued to Management LLC for the exercise of the vested deferred equity units is included in the basic weighted average number of outstanding shares of Class B Common Stock. Upon issuance to the participants in the Plan, the Class B Common Stock will be converted into Class A Common Stock and included in the basic weighted average number of outstanding 93 shares of Class A Common Stock. Since the shares expected to satisfy the vested portion of the deferred equity units are already included in the basic weighted average number of outstanding common shares, there is no potential dilutive effect associated with the vested portion of these stock-based compensation awards. The following table sets forth the calculation of basic and diluted net income (loss) per common share under the two-class method (in millions, except share and per share data): Fiscal Year Ended September 30, 2021 2020 2019 Class A Class B Class A Class B Class A Class B Basic and Diluted EPS: Numerator Net income (loss) attributable to Warner Music Group Corp. $ 68 $ 236 $ ( 21 ) $ ( 454 ) $ — $ 256 Less: Net income attributable to participating securities ( 4 ) — ( 1 ) — — — Net income (loss) attributable to common stockholders $ 64 $ 236 $ ( 22 ) $ ( 454 ) $ — $ 256 Denominator Weighted average shares outstanding 110,560,517 402,911,743 26,897,115 477,624,846 0 501,991,944 Basic and Diluted EPS $ 0.58 $ 0.58 $ ( 0.82 ) $ ( 0.95 ) $ — $ 0.51 4. Revenue Recognition For our operating segments, Recorded Music and Music Publishing, the Company accounts for a contract when it has legally enforceable rights and obligations and collectability of consideration is probable. The Company identifies the performance obligations and determines the transaction price associated with the contract, which is then allocated to each performance obligation, using management’s best estimate of standalone selling price for arrangements with multiple performance obligations. Revenue is recognized when, or as, control of the promised services or goods is transferred to the Company’s customers, and in an amount that reflects the consideration the Company is contractually due in exchange for those services or goods. An estimate of variable consideration is included in the transaction price if, in the Company’s judgment, it is probable that a significant future reversal of cumulative revenue under the contract will not occur. Certain of the Company’s arrangements include licenses of intellectual property with consideration in the form of sales- and usage-based royalties. Royalty revenue is recognized when the subsequent sale or usage occurs using the best estimates available of the amounts that will be received by the Company. 94 Disaggregation of Revenue The Company’s revenue consists of the following categories, which aggregate into the segments – Recorded Music and Music Publishing: Fiscal Year Ended September 30, 2021 2020 2019 (in millions) Revenue by Type Digital $ 3,105 $ 2,568 $ 2,343 Physical 549 434 559 Total Physical and Digital 3,654 3,002 2,902 Artist services and expanded-rights 599 525 629 Licensing 291 283 309 Total Recorded Music 4,544 3,810 3,840 Performance 122 142 183 Digital 436 337 271 Mechanical 49 48 55 Synchronization 144 119 120 Other 10 11 14 Total Music Publishing 761 657 643 Intersegment eliminations ( 4 ) ( 4 ) ( 8 ) Total Revenues $ 5,301 $ 4,463 $ 4,475 Revenue by Geographical Location U.S. Recorded Music $ 1,985 $ 1,609 $ 1,656 U.S. Music Publishing 378 325 300 Total U.S. 2,363 1,934 1,956 International Recorded Music 2,559 2,201 2,184 International Music Publishing 383 332 343 Total International 2,942 2,533 2,527 Intersegment eliminations ( 4 ) ( 4 ) ( 8 ) Total Revenues $ 5,301 $ 4,463 $ 4,475 Recorded Music Recorded Music mainly involves selling, marketing, distribution and licensing of recorded music produced by the Company’s recording artists. Recorded Music revenues are derived from four main sources, which include digital, physical, artist services and expanded-rights and licensing. Digital revenues are generated from the expanded universe of digital partners, including digital streaming services and download services. These licenses typically contain a single performance obligation, which is ongoing access to all intellectual property in an evolving content library, predicated on: (1) the business practice and contractual ability to remove specific content without a requirement to replace the content and without impact to minimum royalty guarantees and (2) the contracts not containing a specific listing of content subject to the license. Digital licensing contracts are generally long-term with consideration in the form of sales- and usage-based royalties that are typically received monthly. Certain contracts contain minimum guarantees, which are recoupable against royalties. Upon contract inception, the Company will assess whether a shortfall or breakage is expected (i.e., where the minimum guarantee will not be recouped through royalties) in order to determine timing of revenue recognition for the minimum guarantee. For fixed fee contracts and minimum guarantee contracts where breakage is expected, the total transaction price (fixed fee or minimum guarantee) is recognized proportionately over the contract term using an appropriate measure of progress which is based on the Company’s digital partner’s subscribers or streaming activity as these are measures of access to an evolving catalog, or on a straight-line basis. The Company updates its assessment of the transaction price each reporting period to see if anticipated royalty earnings exceed the minimum guarantee. For contracts where breakage is not expected, royalties are recognized as revenue as sales or usage occurs based upon the licensee’s usage reports and, when these reports are not available, revenue is based on historical data, industry information and other relevant trends. 95 Additionally, for certain licenses where the consideration is fixed and the intellectual property being licensed is static, revenue is recognized at the point in time when control of the licensed content is transferred to the customer. Physical revenues are generated from the sale of physical products such as vinyl, CDs and DVDs. Revenues from the sale of physical Recorded Music products are recognized upon transfer of control to the customer, which typically occurs once the product has been shipped and the ability to direct use and obtain substantially all of the benefit from the asset have been transferred. In accordance with industry practice and as is customary in many territories, certain products, such as vinyl, CDs and DVDs, are sold to customers with the right to return unsold items. Revenues from such sales are generally recognized upon shipment based on gross sales less a provision for future estimated returns. Artist services and expanded-rights revenues are generated from artist services businesses and participation in expanded-rights associated with artists, including advertising, merchandising including direct-to-consumer sales, touring, concert promotion, ticketing, sponsorship, fan clubs, artist websites, social publishing, and artist and brand management. Artist services and expanded-rights contracts are generally short term. Revenue is recognized as or when services are provided (e.g., at time of an artist’s event) assuming collectability is probable. In some cases, the Company is reliant on the artist to report revenue generating activities. For certain artist services and expanded-rights contracts, collectability is not considered probable until notification is received from the artist’s management. Revenues from the sale of products sold through our e-commerce websites are recognized when control of the goods is transferred to the customer, which is upon receipt of finished goods by the customer. Licensing revenues represent royalties or fees for the right to use sound recordings in combination with visual images such as in films or television programs, television commercials and video games. In certain territories, the Company may also receive royalties when sound recordings are performed publicly through broadcast of music on television, radio and cable and in public spaces such as shops, workplaces, restaurants, bars and clubs. Licensing contracts are generally short term. For fixed-fee contracts, revenue is recognized at the point in time when control of the licensed content is transferred to the customer. Royalty based contracts are recognized as the underlying sales or usage occurs. Music Publishing Music Publishing acts as a copyright owner and/or administrator of the musical compositions and generates revenues related to the exploitation of musical compositions (as opposed to recorded music). Music publishers generally receive royalties from the use of the musical compositions in public performances, digital and physical recordings and in combination with visual images. Music publishing revenues are derived from five main sources: mechanical, performance, synchronization, digital and other. Digital revenues are generated with respect to the musical compositions being embodied in recordings licensed to digital streaming services and digital download services and for digital performance. Performance revenues are received when the musical composition is performed publicly through broadcast of music on television, radio and cable and in retail locations (e.g. bars and restaurants), live performance at a concert or other venue (e.g., arena concerts and nightclubs) and performance of musical compositions in staged theatrical productions. Mechanical revenues are generated with respect to the musical compositions embodied in recordings sold in any physical format or configuration such as vinyl, CDs and DVDs. Synchronization revenues represent the right to use the composition in combination with visual images such as in films or television programs, television commercials and video games as well as from other uses such as in toys or novelty items and merchandise. Other revenues represent earnings for use in printed sheet music and other uses. Digital and synchronization revenue recognition is similar for both Recorded Music and Music Publishing, therefore refer to the discussion within Recorded Music. Included in these revenue streams, excluding synchronization and other, are licenses with performing rights organizations or collecting societies (e.g., ASCAP, BMI, SESAC and GEMA), which are long-term contracts containing a single performance obligation, which is ongoing access to all intellectual property in an evolving content library. The most common form of consideration for these contracts is sales- and usage-based royalties. The collecting societies submit usage reports, typically with payment for royalties due, often on a quarterly or biannual reporting period, in arrears. Royalties are recognized as the sale or usage occurs based upon usage reports and, when these reports are not available, royalties are estimated based on historical data, such as recent royalties reported, company-specific information with respect to changes in repertoire, industry information and other relevant trends. Also included in these revenue streams are smaller, short-term contracts for specified content, which generally involve a fixed fee. For fixed-fee contracts, revenue is recognized at the point in time when control of the license is transferred to the customer. The Company excludes from the measurement of transaction price all taxes assessed by governmental authorities that are both (i) imposed on and concurrent with a specific revenue-producing transaction and (ii) collected from customers. 96 Sales Returns and Uncollectible Accounts In accordance with practice in the recorded music industry and as customary in many territories, certain physical revenue products (such as vinyl, CDs and DVDs) are sold to customers with the right to return unsold items. Revenues from such sales are recognized when the products are shipped based on gross sales less a provision for future estimated returns. In determining the estimate of physical product sales that will be returned, management analyzes vendor sales of product, historical return trends, current economic conditions, changes in customer demand and commercial acceptance of the Company’s products. Based on this information, management reserves a percentage of each dollar of physical product sales that provide the customer with the right of return and records an asset for the value of the returned goods and liability for the amounts expected to be refunded. Similarly, management evaluates accounts receivables to determine if they will ultimately be collected. In performing this evaluation, significant judgments and estimates are involved, including an analysis of specific risks on a customer-by-customer basis for larger accounts and customers and a receivables aging analysis that determines the percent that has historically been uncollected by aged category, in addition to other factors to estimate an allowance for credit losses. The time between the Company’s issuance of an invoice and payment due date is not significant; customer payments that are not collected in advance of the transfer of promised services or goods are generally due no later than 30 days from invoice date. Based on this information, management provides a reserve for estimated credit losses. Based on management’s analysis of sales returns, refund liabilities of $ 23 million and $ 24 million were established at September 30, 2021 and September 30, 2020, respectively. Based on management’s analysis of estimated credit losses, reserves of $ 20 million and $ 23 million were established at September 30, 2021 and September 30, 2020, respectively. Principal versus Agent Revenue Recognition The Company reports revenue on a gross or net basis based on management’s assessment of whether the Company acts as a principal or agent in the transaction. The determination of whether the Company acts as a principal or an agent in a transaction is based on an evaluation of whether the Company controls the good or service before transfer to the customer. When the Company concludes that it controls the good or service before transfer to the customer, the Company is considered a principal in the transaction and records revenue on a gross basis. When the Company concludes that it does not control the good or service before transfer to the customer but arranges for another entity to provide the good or service, the Company acts as an agent and records revenue on a net basis in the amount it earns for its agency service. In the normal course of business, the Company distributes music content on behalf of third-party record labels. Based on the above guidance, the Company records the distribution of content of third-party record labels on a gross basis, subject to the terms of the contract, as the Company controls the content before transfer to the customer. Conversely, recorded music distributed by other record companies where the Company has a right to participate in the profits are recorded on a net basis. Deferred Revenue Deferred revenue principally relates to fixed fees and minimum guarantees received in advance of the Company’s performance or usage by the licensee. Reductions in deferred revenue are a result of the Company’s performance under the contract or usage by the licensee. Deferred revenue increased by $ 585 million during the fiscal year ended September 30, 2021 and $ 527 million during the fiscal year ended September 30, 2020 related to cash received from customers for fixed fees and minimum guarantees in advance of performance, including amounts recognized in the period. Revenue recognized during the fiscal years ended September 30, 2021 and 2020 which was included in the deferred revenue balance at the beginning of each respective period was $ 232 million and $ 157 million. There were no other significant changes to deferred revenue during the reporting period. Performance Obligations For the fiscal years ended September 30, 2021, 2020 and 2019, the Company recognized revenue of $ 64 million, $ 42 million and $ 51 million from performance obligations satisfied in previous periods. 97 Wholly and partially unsatisfied performance obligations represent future revenues not yet recorded under long-term intellectual property licensing contracts containing fixed fees, advances and minimum guarantees. Revenues expected to be recognized in the future related to performance obligations that are unsatisfied at September 30, 2021 are as follows: FY22 FY23 FY24 Thereafter Total (in millions) Remaining performance obligations $ 483 $ 306 $ 120 $ 1 $ 910 Total $ 483 $ 306 $ 120 $ 1 $ 910 5. Comprehensive Income (Loss) Comprehensive income (loss), which is reported in the accompanying consolidated statements of equity (deficit), consists of net income and other gains and losses affecting equity that, under U.S. GAAP, are excluded from net income. For the Company, the components of other comprehensive income (loss) primarily consist of foreign currency translation gains and losses, minimum pension liabilities, and deferred gains and losses on financial instruments designated as hedges under ASC 815, Derivatives and Hedging , which include foreign exchange contracts. The following summary sets forth the changes in the components of accumulated other comprehensive loss, net of related tax expense of approximately $ 4 million: Foreign Currency Translation Loss (a) Minimum Pension Liability Adjustment Deferred Gains (Losses) On Derivative Financial Instruments Accumulated Other Comprehensive Loss, net (in millions) Balances at September 30, 2018 $ ( 184 ) $ ( 9 ) $ 3 $ ( 190 ) Other comprehensive loss ( 34 ) ( 5 ) ( 11 ) ( 50 ) Balances at September 30, 2019 $ ( 218 ) $ ( 14 ) $ ( 8 ) $ ( 240 ) Other comprehensive income 37 2 ( 21 ) 18 Balances at September 30, 2020 $ ( 181 ) $ ( 12 ) $ ( 29 ) $ ( 222 ) Other comprehensive income 7 1 12 20 Balances at September 30, 2021 $ ( 174 ) $ ( 11 ) $ ( 17 ) $ ( 202 ) ______________________________________ (a) Includes historical foreign currency translation related to certain intra-entity transactions. 6. Property, Plant and Equipment Property, plant and equipment consist of the following: September 30, 2021 September 30, 2020 (in millions) Land $ 12 $ 12 Buildings and improvements 185 179 Furniture and fixtures 36 31 Computer hardware and software 427 371 Construction in progress 93 64 Machinery and equipment 30 29 Gross Property, Plant and Equipment $ 783 $ 686 Less: Accumulated depreciation ( 419 ) ( 355 ) Net Property, Plant and Equipment $ 364 $ 331 98 7. Leases The Company’s lease portfolio consists operating real estate leases for its corporate offices and, to a lesser extent, storage and other equipment. The Company adopted FASB ASC Topic 842, Leases (“ASC 842”), on October 1, 2019 using the modified retrospective transition method. Under ASC 842, a contract is or contains a lease when (1) an explicitly or implicitly identified asset has been deployed in the contract and (2) the customer obtains substantially all of the economic benefits from the use of that underlying asset and directs how and for what purpose the asset is used during the term of the contract. The Company determines if an arrangement is or contains a lease at inception of the contract. For all leases (finance and operating), other than those that qualify for the short-term recognition exemption, the Company will recognize on the balance sheet a lease liability for its obligation to make lease payments arising from the lease and a corresponding ROU asset representing its right to use the underlying asset over the period of use based on the present value of lease payments over the lease term as of the lease commencement date. ROU assets are adjusted for initial direct costs, lease payments made and incentives. As the rates implicit in our leases are not readily determinable, the Company uses its incremental borrowing rate based on the information available at the lease commencement date in determining the present value of lease payments. This rate is based on the estimated rate of interest for collateralized borrowing over a similar term of the lease payments. The lease term used to calculate the lease liability will include options to extend or terminate the lease when the option to extend or terminate is at the Company’s discretion and it is reasonably certain that the Company will exercise the option. Fixed payments are recognized as lease expense on a straight-line basis over the lease term. For leases with a term of one year or less (“short-term leases”), the lease payments are recognized in the consolidated statements of operations on a straight-line basis over the lease term. ASC 842 requires that only limited types of variable payments be included in the determination of lease payments, which affects lease classification and measurement. Variable lease costs, if any, are recognized as incurred and such costs are excluded from lease balances recorded on the consolidated balance sheet. The initial measurement of the lease liability and ROU asset are determined based on fixed lease payments. Lease payments that depend on an index or a rate (such as the Consumer Price Index or a market interest rate) are variable and are recognized in the period in which the payments are incurred. The Company’s operating ROU assets are included in operating lease right-of-use assets and the Company’s current and non-current operating lease liabilities are included in operating lease liabilities, current and operating lease liabilities, noncurrent, respectively, in the Company’s balance sheet. Operating lease liabilities are amortized using the effective interest method. That is, in each period, the liability will be increased to reflect the interest that is accrued on the related liability by using the appropriate discount rate and decreased by the lease payments made during the period. The subsequent measurement of the ROU asset is linked to the amount recognized as the lease liability. Accordingly, the ROU asset is measured as the lease liability adjusted by (1) accrued or prepaid rents (i.e., the aggregate difference between the cash payment and straight-line lease cost), (2) remaining unamortized initial direct costs and lease incentives, and (3) impairments of the ROU asset. Operating lease costs are included in Selling, general and administrative expenses. For lease agreements that contain both lease and non-lease components, the Company has elected the practical expedient provided by ASC 842 that permits the accounting for these components as a single lease component (rather than separating the lease from the non-lease components and accounting for the components individually). The Company enters into operating leases for buildings, office equipment, production equipment, warehouses, and other types of equipment. Our leases have remaining lease terms of 1 year to 21 years, some of which include options to extend the leases for up to 10 years, and some of which include options to terminate the leases within 1 year. Among the Company’s operating leases are its leases for the Ford Factory Building, located at 777 S. Santa Fe Avenue in Los Angeles, California, and for 27 Wrights Lane, Kensington, London. The landlord for both leases is an affiliate of Access. As of September 30, 2021, the aggregate lease liability related to these leases was $ 125 million. See also Note 13, Related Party Transactions. There are no restrictions or covenants, such as those relating to dividends or incurring additional financial obligations, relating to our lease portfolio, and residual value guarantees are not significant. 99 The components of lease expense were as follows: Fiscal Year Ended September 30, 2021 2020 (in millions) Lease Cost Operating lease cost $ 55 $ 53 Short-term lease cost 2 1 Variable lease cost 11 8 Total lease cost $ 68 $ 62 The Company incurred and recorded other occupancy expenses of $ 16 million and $ 18 million for the fiscal years ended September 30, 2021 and 2020, respectively. Supplemental cash flow information related to leases was as follows: Fiscal Year Ended September 30, 2021 2020 (in millions) Cash paid for amounts included in the measurement of operating lease liabilities $ 59 $ 55 Right-of-use assets obtained in exchange for operating lease obligations 25 14 Supplemental balance sheet information related to leases was as follows: September 30, 2021 September 30, 2020 (in millions) Operating Leases Operating lease right-of-use assets $ 268 $ 273 Operating lease liabilities, current $ 43 $ 39 Operating lease liabilities, noncurrent 287 299 Total operating lease liabilities $ 330 $ 338 Weighted Average Remaining Lease Term Operating leases 8 years 8 years Weighted Average Discount Rate Operating leases 4.69 % 4.58 % Maturities of lease liabilities were as follows: Fiscal Year Ended September 30, Operating Leases (in millions) 2022 $ 57 2023 56 2024 52 2025 50 2026 44 Thereafter 136 Total lease payments 395 Less: Imputed interest ( 65 ) Total $ 330 As of September 30, 2021, there have been no leases entered into that have not yet commenced. 100 8. Goodwill and Intangible Assets Goodwill The following analysis details the changes in goodwill for each reportable segment: Recorded Music Music Publishing Total (in millions) Balances at September 30, 2019 $ 1,297 $ 464 $ 1,761 Acquisitions 47 — 47 Other adjustments 23 — 23 Balances at September 30, 2020 $ 1,367 $ 464 $ 1,831 Acquisitions ( 7 ) — ( 7 ) Other adjustments 6 — 6 Balances at September 30, 2021 $ 1,366 $ 464 $ 1,830 The decrease in goodwill during the fiscal year ended September 30, 2021 includes purchase price allocations for acquisitions closed during the fiscal year ended September 30, 2021 offset by measurement period adjustments for acquisitions which closed during the fiscal year ended September 30, 2020. The increase in goodwill during the fiscal year ended September 30, 2020 primarily relates to an acquisition in August 2020, which resulted in goodwill of $ 47 million. The other adjustments during both the fiscal years ended September 30, 2021 and September 30, 2020 primarily represent foreign currency movements. The Company performs its annual goodwill impairment test in accordance with ASC 350 during the fourth quarter of each fiscal year as of July 1. The Company may conduct an earlier review if events or circumstances occur that would suggest the carrying value of the Company’s goodwill may not be recoverable. The performance of the annual fiscal 2021 impairment analysis did not result in an impairment of the Company’s goodwill. Intangible Assets Intangible assets consist of the following: Weighted-Average Useful Life September 30, 2021 September 30, 2020 (in millions) Intangible assets subject to amortization: Recorded music catalog 12 years $ 1,206 $ 876 Music publishing copyrights 26 years 1,730 1,597 Artist and songwriter contracts 13 years 997 862 Trademarks 15 years 96 81 Other intangible assets 6 years 96 84 Total gross intangible assets subject to amortization 4,125 3,500 Accumulated amortization ( 2,108 ) ( 1,847 ) Total net intangible assets subject to amortization 2,017 1,653 Intangible assets not subject to amortization: Trademarks and tradenames Indefinite 154 154 Total net intangible assets $ 2,171 $ 1,807 The increase in intangible assets during the fiscal year ended September 30, 2021 primarily relates to certain acquisition transactions of music-related assets within recorded music catalogs, music publishing copyrights, and artist and songwriter contracts for approximately $ 471 million. The Company performs its annual indefinite-lived intangible assets impairment test in accordance with ASC 350 during the fourth quarter of each fiscal year as of July 1. The Company may conduct an earlier review if events or circumstances occur that would suggest the carrying value of the Company’s indefinite-lived intangible assets may not be recoverable. The performance of the annual fiscal 2021 impairment analysis did not result in an impairment of the Company’s indefinite-lived intangible assets. 101 Amortization Based on the amount of intangible assets subject to amortization at September 30, 2021, the expected amortization for each of the next five fiscal years and thereafter are as follows: Fiscal Year Ended September 30, Amortization Expense (in millions) 2022 $ 233 2023 202 2024 162 2025 156 2026 140 Thereafter 1,124 Total $ 2,017 The life of all acquired intangible assets is evaluated based on the expected future cash flows associated with the asset. The expected amortization expense above reflects estimated useful lives assigned to the Company’s identifiable, finite-lived intangible assets primarily established in the accounting for the Merger and the acquisition of PLG. 9. Debt Debt Capitalization Long-term debt, all of which was issued by Acquisition Corp., consists of the following: September 30, 2021 September 30, 2020 (in millions) Revolving Credit Facility (a) $ — $ — Senior Term Loan Facility due 2028 1,145 820 3.625 % Senior Secured Notes due 2026 (€ 445 face amount) (b) — 518 2.750 % Senior Secured Notes due 2028 (€ 325 face amount) 381 379 3.875 % Senior Secured Notes due 2030 535 535 2.250 % Senior Secured Notes due 2031 (€ 445 face amount) 522 — 3.000 % Senior Secured Notes due 2031 800 550 5.500 % Senior Notes due 2026 (b) — 325 Total long-term debt, including the current portion $ 3,383 $ 3,127 Issuance premium less unamortized discount and unamortized deferred financing costs $ ( 37 ) $ ( 23 ) Total long-term debt, including the current portion, net $ 3,346 $ 3,104 ______________________________________ (a) Reflects $ 300 million of commitments under the Revolving Credit Facility, less letters of credit outstanding of approximately $ 7 million and $ 10 million at September 30, 2021 and September 30, 2020, respectively. There were no loans outstanding under the Revolving Credit Facility at September 30, 2021 or September 30, 2020. (b) In April 2021 the 5.500 % Senior Notes due 2026 were redeemed in full, and in August 2021 the 3.625 % Senior Secured Notes due 2026 were redeemed in full. 102 The Company is the direct parent of Holdings, which is the direct parent of Acquisition Corp. As of September 30, 2021 Acquisition Corp. had issued and outstanding the 2.750 % Senior Secured Notes due 2028, the 3.875 % Senior Secured Notes due 2030, the 2.250 % Senior Secured Notes due 2031 and the 3.000 % Senior Secured Notes due 2031 (together, the “Acquisition Corp. Notes”). All of the Acquisition Corp. Notes are guaranteed by all of Acquisition Corp.’s domestic wholly-owned subsidiaries. The guarantee of the Acquisition Corp. Notes by Acquisition Corp.’s domestic wholly-owned subsidiaries is full, unconditional and joint and several. The secured notes are guaranteed on a senior secured basis and the unsecured notes were guaranteed on an unsecured senior basis. The Company and Holdings are holding companies that conduct substantially all of their business operations through Acquisition Corp. Accordingly, the ability of the Company and Holdings to obtain funds from their subsidiaries is restricted by the indentures for the Acquisition Corp. Notes, as well as the credit agreements for the Acquisition Corp. Senior Credit Facilities, including the Revolving Credit Facility and the Senior Term Loan Facility. Fiscal 2021 Transactions Additional 3.000 % Senior Secured Notes On November 2, 2020, Acquisition Corp. issued and sold $ 250 million of additional 3.000 % Senior Secured Notes (the “Additional Notes”). Interest on the Additional Notes will accrue at the rate of 3.000 % per annum and will be payable semi-annually in arrears on February 15 and August 15, commencing on February 15, 2021. The Additional Notes have identical terms as (other than the issue date and the issue price) and are fungible with, and treated as a single series of senior secured debt securities with, the 3.000 % Senior Secured Notes issued on August 12, 2020 (the “Original Notes”). Senior Term Loan Facility Amendment On January 20, 2021, Acquisition Corp. entered into an amendment (the “Senior Term Loan Credit Agreement Amendment”) to the credit agreement, dated November 1, 2012 (as amended by the amendments dated as of May 9, 2013, July 13, 2016, November 21, 2016, May 22, 2017, December 6, 2017 and June 7, 2018), among Acquisition Corp., the guarantors party thereto, the lenders party thereto and Credit Suisse AG, as administrative agent, governing the Senior Term Loan Facility with Credit Suisse AG, as administrative agent, and the other financial institutions and lenders from time to time party thereto (the “Senior Term Loan Credit Agreement”). The Senior Term Loan Credit Agreement Amendment (among other changes) (i) extends the maturity date of its outstanding term loans from November 1, 2023 to January 20, 2028 and (ii) removes a number of negative covenants limiting the ability of Acquisition Corp. to take various actions. The remaining negative covenants are limited to restrictions on liens, restrictions on fundamental changes and change of control, and are in a form substantially similar to the negative covenants in the 2.750 % Senior Secured Notes due 2028, 3.875 % Senior Secured Notes due 2030, 3.000 % Senior Secured Notes due 2031 and 2.250 % Senior Secured Notes due 2031. The Company recorded approximately $ 3 million of expenses associated with fees paid to third parties in connection with this debt modification and capitalized approximately $ 1 million in fees paid to lenders. Revolving Credit Agreement Amendment On March 1, 2021, Acquisition Corp. entered into an amendment (the “Revolving Credit Agreement Amendment”) to the revolving credit agreement, dated January 31, 2018 (as amended by the amendments dated as of October 9, 2019 and April 3, 2020), among Acquisition Corp., the several banks and other financial institutions party thereto and Credit Suisse AG, as administrative agent, governing Acquisition Corp.’s revolving credit facility with Credit Suisse AG, as administrative agent, and the other financial institutions and lenders from time to time party thereto. The Revolving Credit Agreement Amendment (among other changes) adds certain exceptions and increases the leverage ratio below which Acquisition Corp. can access certain baskets in connection with Acquisition Corp.’s negative covenants, including those related to incurrence of indebtedness, restricted payments and covenant suspension. Senior Term Loan Facility Increase Supplement and Redemption of 5.500 % Senior Notes due 2026 On March 8, 2021, Acquisition Corp. entered into an Increase Supplement (the “Increase Supplement”), dated as of March 8, 2021, among Acquisition Corp., the guarantors party thereto, WMG Holdings Corp., Credit Suisse AG, Cayman Islands Branch, as increasing lender, and Credit Suisse AG, as administrative agent, to the Senior Term Loan Credit Agreement, whereby prior to April 22, 2021 and subject to the satisfaction of certain conditions, Acquisition Corp. may borrow additional term loans in an amount up to $ 325 million for an aggregate principal amount outstanding under the Senior Term Loan Credit Agreement of up to $ 1,145 million. The Increase Supplement was entered into to provide for the redemption of Acquisition Corp.’s 5.500 % Senior Notes due 2026 (the “ 5.500 % Senior Notes”). 103 On April 14, 2021, Acquisition Corp. borrowed additional term loans in an amount of $ 325 million under the Increase Supplement. Following such borrowing, there was an aggregate principal amount outstanding under the Senior Term Loan Credit Agreement of $ 1,145 million. On April 15, 2021, Acquisition Corp. redeemed all of the outstanding 5.500 % Senior Notes. The redemption price for the 5.500 % Senior Notes was approximately $ 343 million, equivalent to 102.750 % of the principal amount of the 5.500 % Senior Notes, plus accrued but unpaid interest thereon to, but excluding, the redemption date, which was April 15, 2021. The Company recorded a loss on extinguishment of debt of approximately $ 12 million, which represents the premium paid on early redemption and unamortized deferred financing costs. 2.250 % Senior Secured Notes Offering On August 16, 2021, Acquisition Corp. issued and sold € 445 million in aggregate principal amount of its 2.250 % Senior Secured Notes due 2031 (the “ 2.250 % Senior Secured Notes”). Net proceeds of the offering, together with available cash, were used to redeem in full all of the outstanding 3.625 % Senior Secured Notes due 2026 (the “ 3.625 % Senior Secured Notes”), as described below. Interest on the Notes will accrue at the rate of 2.250 % per annum and will be payable semi-annually in arrears on February 15 and August 15, commencing on February 15, 2022. The 2.250 % Senior Secured Notes are fully and unconditionally guaranteed on a senior secured basis by each of the Issuer’s existing direct or indirect wholly-owned domestic restricted subsidiaries and by any such subsidiaries that guarantee obligations of the Issuer under the Credit Facilities, subject to customary exceptions. The indenture governing the 2.250 % Senior Secured Notes contains covenants limiting, among other things, Acquisition Corp.’s ability and the ability of most of its subsidiaries to create liens and consolidate, merge, sell or otherwise dispose of all or substantially all of its assets. Redemption of 3.625 % Senior Secured Notes On August 16, 2021, Acquisition Corp. redeemed in full all of the outstanding 3.625 % Senior Secured Notes. The redemption price for the 3.625 % Senior Secured Notes was approximately € 463 million, equivalent to 102.280 % of the principal amount of the 3.625 % Senior Secured Notes, plus accrued but unpaid interest thereon to, but excluding, the redemption date, which was August 16, 2021. The Company recorded a loss on extinguishment of debt of approximately $ 10 million, which represents the premium paid on early redemption, unamortized deferred financing costs and unamortized premium. Historical Transactions Revolving Credit Agreement Amendment On April 3, 2020, Acquisition Corp. entered into an amendment (the “Second Amendment”) to the Revolving Credit Agreement, dated January 31, 2018 (as amended by the amendment dated October 9, 2019), among Acquisition Corp., the several banks and other financial institutions party thereto and Credit Suisse AG, as administrative agent, governing Acquisition Corp.’s senior secured revolving credit facility (the “Revolving Credit Facility”) with Credit Suisse AG, as administrative agent, and the other financial institutions and lenders from time to time party thereto. The Second Amendment (among other changes) (i) increases the commitments under the Revolving Credit Facility from an aggregate principal amount of $ 180 million to an aggregate principal amount of $ 300 million, (ii) extends the final maturity date of the Revolving Credit Facility from January 31, 2023 to April 3, 2025, (iii) reduces the interest margin applicable to the loans upon achievement of certain leverage ratios based on a leverage-based pricing grid, (iv) reduces the commitment fee based on a leverage-based pricing grid and limits commitment fees to be paid only on unused amounts of commitments, (v) increases the maximum letter of credit exposure permitted under the Revolving Credit Facility from $ 50 million to $ 90 million, (vi) increases the springing financial maintenance covenant from a Senior Secured Indebtedness to EBITDA Ratio of 4.75 :1.00 to a Senior Secured Indebtedness to EBITDA Ratio of 5.00 :1.00 and provides that the covenant shall not be tested, unless at the end of a fiscal quarter the outstanding amount of loans and drawings under letters of credit which have not been reimbursed exceeds $ 105 million, (vii) adds covenant suspension upon achievement of an investment grade rating or a Total Indebtedness to EBITDA Ratio of 3.25 :1.00, and (viii) adds certain exceptions and increases certain baskets in connection with Acquisition Corp.’s negative covenants, including those related to the incurrence of indebtedness, liens and restricted payments. The Company incurred approximately $ 1 million in financing fees associated with the Second Amendment which were capitalized and will be amortized over the amended term of the Revolving Credit Facility. Redemption of 4.125 % Senior Secured Notes and 4.875 % Senior Secured Notes On June 30, 2020, Acquisition Corp. redeemed in full all of the outstanding aggregate principal amount of the 4.125 % Senior Secured Notes and 4.875 % Senior Secured Notes, equal to € 311 million aggregate principal amount of the 4.125 % Senior Secured Notes and $ 220 million aggregate principal amount of the 4.875 % Senior Secured Notes, using a portion of the proceeds from the 104 offering of 3.875 % Senior Secured Notes and 2.750 % Senior Secured Notes described below. The redemption price for the 4.125 % Senior Secured Notes was approximately € 322 million, equivalent to 103.094 % of the principal amount of the 4.125 % Senior Secured Notes, plus accrued but unpaid interest thereon to, but excluding, the redemption date, which was June 30, 2020. The redemption price for the 4.875 % Senior Secured Notes was approximately $ 230 million, equivalent to 103.656 % of the principal amount of the 4.875 % Senior Secured Notes, plus accrued but unpaid interest thereon to, but excluding, the redemption date, which was June 30, 2020. The Company recorded a loss on extinguishment of debt of approximately $ 24 million for the fiscal year ended 2020 as a result of these redemptions, which represents the premium paid on early redemption and unamortized deferred financing costs. Tender Offer and Redemption of 5.000 % Senior Secured Notes On June 16, 2020, Acquisition Corp. announced a cash tender offer to purchase any and all of the 5.000 % Senior Secured Notes. On June 30, 2020, Acquisition Corp. announced that $ 244 million of the aggregate principal amount of $ 300 million outstanding had tendered and been accepted in the tender offer. Also on June 30, 2020, Acquisition Corp. issued a notice of redemption calling the remaining outstanding 5.000 % Senior Secured Notes not tendered in the tender offer for redemption on August 1, 2020. An additional $ 295,000 tendered and was accepted in the tender offer on July 14, 2020 and Acquisition Corp. redeemed all 5.000 % Senior Secured Notes that were not tendered and accepted for purchase in the tender offer and consent solicitation on August 1, 2020 at the then-applicable redemption price of 101.250 %. The Company recorded a loss on extinguishment of debt of approximately $ 6 million for the fiscal year ended 2020 as a result of this tender offer and redemption, which represents the premium to tender and unamortized deferred financing costs. 3.875 % Senior Secured Notes and 2.750 % Senior Secured Notes Offerings On June 29, 2020, Acquisition Corp. issued and sold $ 535 million in aggregate principal amount of 3.875 % Senior Secured Notes due 2030 (the “ 3.875 % Senior Secured Notes”) and € 325 million in aggregate principal amount of 2.750 % Senior Secured Notes due 2028 (the “ 2.750 % Senior Secured Notes”). Net proceeds of the offerings were used to redeem € 311 million of the 4.125 % Senior Secured Notes and $ 220 million of the 4.875 % Senior Secured Notes (as described above), constituting the redemption of all of the outstanding aggregate principal amount of the 4.125 % Senior Secured Notes and the 4.875 % Senior Secured Notes, and the remaining proceeds were used towards the tender offer for $ 300 million aggregate principal amount of 5.000 % Senior Secured Notes, $ 244 million of which was tendered and accepted on June 29, 2020 and $ 295,000 of which was tendered and accepted on July 14, 2020. The remainder of the 5.000 % Senior Secured Notes not tendered in the tender offer were redeemed on August 1, 2020 (as described above). Interest on the 3.875 % Senior Secured Notes will accrue at the rate of 3.875 % per annum and will be payable semi-annually in arrears on January 15 and July 15, commencing on January 15, 2021. Interest on the 2.750 % Senior Secured Notes will accrue at the rate of 2.750 % per annum and will be payable semi-annually in arrears on January 15 and July 15, commencing on January 15, 2021. The 3.875 % Senior Secured Notes and the 2.750 % Senior Secured Notes are fully and unconditionally guaranteed on a senior secured basis by each of Acquisition Corp.’s existing direct or indirect wholly-owned domestic restricted subsidiaries and by any such subsidiaries that guarantee obligations of Acquisition Corp. under its existing credit facilities, subject to customary exceptions. The indentures governing the 3.875 % Senior Secured Notes and the 2.750 % Senior Secured Notes (collectively, the “Secured Notes Indenture”) do not contain many of the restrictive covenants, certain events of default and other related provisions contained in the indentures previously governing the 4.125 % Senior Secured Notes and 4.875 % Senior Secured Notes. The Secured Notes Indenture contains covenants limiting, among other things, Acquisition Corp.’s ability and the ability of most of its subsidiaries to create liens and consolidate, merge, sell or otherwise dispose of all or substantially all of its assets. 3.000 % Senior Secured Notes Offering On August 12, 2020, Acquisition Corp. issued and sold $ 550 million in aggregate principal amount of 3.000 % Senior Secured Notes due 2031 (the “ 3.000 % Senior Secured Notes”). Net proceeds of the offering were used to repay a portion of the Senior Term Loan Facility and to pay certain other related fees and expenses. Interest on the Notes will accrue at the rate of 3.000 % per annum and will be payable semi-annually in arrears on February 15 and August 15, commencing on February 15, 2021. The Company recorded a loss on extinguishment of debt of approximately $ 4 million which represented unamortized discount and unamortized deferred financing cost associated with the portion of the term loan repaid. Interest on the 3.000 % Senior Secured Notes will accrue at the rate of 3.000 % per annum and will be payable semi-annually in arrears on February 15 and August 15, commencing on February 15, 2021. 105 The 3.000 % Senior Secured Notes are fully and unconditionally guaranteed on a senior secured basis by each of Acquisition Corp.’s existing direct or indirect wholly-owned domestic restricted subsidiaries and by any such subsidiaries that guarantee obligations of Acquisition Corp. under its existing credit facilities, subject to customary exceptions. The indenture governing the 3.000 % Senior Secured Notes contains covenants limiting, among other things, Acquisition Corp.’s ability and the ability of most of its subsidiaries to create liens and consolidate, merge, sell or otherwise dispose of all or substantially all of its assets. Interest Rates The loans under the Revolving Credit Facility bear interest at Acquisition Corp.’s election at a rate equal to (i) the rate for deposits in the borrowing currency in the London interbank market (adjusted for maximum reserves) for the applicable interest period (“Revolving LIBOR”) subject to a zero floor, plus 1.75 % per annum in the case of Initial Revolving Loans (as defined in the Revolving Credit Agreement), or 1.875 % per annum in the case of 2020 Revolving Loans (as defined in the Revolving Credit Agreement), or (ii) the base rate, which is the highest of (x) the corporate base rate established by the administrative agent from time to time, (y) 0.50 % in excess of the overnight federal funds rate and (z) the one-month Revolving LIBOR plus 1.0 % per annum, plus, in each case, 0.75 % per annum in the case of Initial Revolving Loans, or 0.875 % per annum in the case of 2020 Revolving Loans; provided that, in respect of 2020 Revolving Loans, the applicable margin with respect to such loans is subject to adjustment as set forth in the pricing grid in the Revolving Credit Agreement. Based on the Senior Secured Indebtedness to EBITDA Ratio of 2.84 x at September 30, 2021, the applicable margin for Eurodollar loans would be 1.375 % instead of 1.875 % and the applicable margin for ABR loans would be 0.375 % instead of 0.875 % in the case of 2020 Revolving Loans. If there is a payment default at any time, then the interest rate applicable to overdue principal will be the rate otherwise applicable to such loan plus 2.0 % per annum. Default interest will also be payable on other overdue amounts at a rate of 2.0 % per annum above the amount that would apply to an alternative base rate loan. The loans under the Senior Term Loan Facility bear interest at Acquisition Corp.’s election at a rate equal to (i) the rate for deposits in U.S. dollars in the London interbank market (adjusted for maximum reserves) for the applicable interest period (“Term Loan LIBOR”) subject to a zero floor, plus 2.125 % per annum or (ii) the base rate, which is the highest of (x) the corporate base rate established by the administrative agent as its prime rate in effect at its principal office in New York City from time to time, (y) 0.50 % in excess of the overnight federal funds rate and (z) one-month Term Loan LIBOR, plus 1.00 % per annum, plus, in each case, 1.125 % per annum. If there is a payment default at any time, then the interest rate applicable to overdue principal and interest will be the rate otherwise applicable to such loan plus 2.0 % per annum. Default interest will also be payable on other overdue amounts at a rate of 2.0 % per annum above the amount that would apply to an alternative base rate loan. The Company has entered into, and in the future may enter into, interest rate swaps to manage interest rate risk. Please refer to Note 15 of our consolidated financial statements for further discussion. Maturity of Senior Term Loan Facility The loans outstanding under the Senior Term Loan Facility mature on January 20, 2028. Maturity of Revolving Credit Facility The maturity date of the Revolving Credit Facility is April 3, 2025. Maturities of Senior Secured Notes As of September 30, 2021, there are no scheduled maturities of notes until 2028, when $ 381 million is scheduled to mature. Thereafter, $ 1.857 billion is scheduled to mature. Interest Expense, net Total interest expense, net was $ 122 million, $ 127 million and $ 142 million for the fiscal years ended September 30, 2021, September 30, 2020 and September 30, 2019, respectively. The weighted-average interest rate of the Company’s total debt was 3.2 % at September 30, 2021, 3.7 % at September 30, 2020 and 4.3 % at September 30, 2019. 106 10. Income Taxes On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (“Tax Act”). The Tax Act significantly revised the U.S. federal corporate income tax provisions, including, but not limited to, a reduction of the U.S. federal corporate statutory tax rate from 35% to 21%, a one-time transition tax on accumulated foreign earnings, an income inclusion of global intangible low-taxed income (“GILTI”), a deduction against foreign-derived intangible income (“FDII”) and a new minimum tax, the base erosion anti-abuse tax (“BEAT”). In accordance with ASC 740, the Company recorded the effects of the Tax Act during the three months ended December 31, 2017. The Company has not recorded any income tax liability related to the one-time transition tax on accumulated foreign earnings (“Transition Tax”) due to an overall deficit in accumulated foreign earnings. GILTI, FDII and BEAT are effective for the Company’s fiscal year ending September 30, 2019. The Company has elected to recognize the GILTI impact in the specific period in which it occurs. The domestic and foreign pretax income (loss) from continuing operations is as follows: Fiscal Year Ended September 30, 2021 2020 2019 (in millions) Domestic $ 182 $ ( 655 ) $ 84 Foreign 274 208 183 Income (loss) before income taxes $ 456 $ ( 447 ) $ 267 Current and deferred income tax expense provided are as follows: Fiscal Year Ended September 30, 2021 2020 2019 (in millions) Federal: Current $ 6 $ 3 $ — Deferred 31 ( 28 ) ( 49 ) Foreign: Current (a) 107 74 74 Deferred ( 5 ) ( 28 ) ( 18 ) U.S. State: Current 9 3 3 Deferred 1 ( 1 ) ( 1 ) Income tax expense $ 149 $ 23 $ 9 ______________________________________ (a) Includes withholding taxes of $ 26 million, $ 15 million and $ 17 million for the fiscal years ended September 30, 2021, 2020 and 2019, respectively. 107 The differences between the U.S. federal statutory income tax rate of 21.0 % for each of the fiscal years ended September 30, 2021, 2020 and 2019 and income taxes provided are as follows: Fiscal Year Ended September 30, 2021 2020 2019 (in millions) Taxes on income at the U.S. federal statutory rate $ 96 $ ( 94 ) $ 56 U.S. state and local taxes 10 2 2 Foreign income taxed at different rates, including withholding taxes 34 10 16 Increase in valuation allowance 2 1 1 Release of valuation allowance ( 6 ) ( 38 ) ( 65 ) Change in tax rates 10 4 ( 4 ) Impact of GILTI and FDII ( 4 ) 2 ( 4 ) IPO Costs — 22 — Executive Compensation 2 2 — Non-deductible long term incentive plan 3 112 6 Other 2 — 1 Income tax expense $ 149 $ 23 $ 9 During the fiscal year ended September 30, 2021, the Company recognized $ 10 million of income tax expense arising from an increase in our net U.K. deferred tax liability due to the change in the U.K. future statutory tax rate, which was offset by $ 4 million of excess tax benefits from long term incentive plan, and $ 6 million for the release of valuation allowances in Mexico and various foreign jurisdictions. During the fiscal year ended September 30, 2020, the Company recognized a net U.S. tax benefit of $ 25 million primarily related to the release of a U.S. deferred tax valuation allowance of $ 33 million offset by a write-off of expiring foreign tax credits of $ 10 million and a tax benefit of $ 15 million for the release of valuation allowances in Japan and various foreign jurisdictions. During the fiscal year ended September 30, 2019, the Company recognized a U.S. tax benefit of $ 59 million related to the release of valuation allowance on U.S. foreign tax credits. For the fiscal years ended September 30, 2021 and September 30, 2020, the Company incurred losses in certain foreign territories and has offset the tax benefit associated with these losses with a valuation allowance as the Company has determined that it is more likely than not that these losses will not be utilized. For the fiscal year ended September 30, 2020, the Company released $ 33 million and of the U.S. valuation allowance related to foreign tax credit carryforwards. Significant components of the Company’s net deferred tax liabilities are summarized below: September 30, 2021 September 30, 2020 (in millions) Deferred tax assets: Allowances and reserves $ 25 $ 30 Employee benefits and compensation 78 80 Other accruals 14 19 Tax attribute carryforwards 135 168 Other 3 22 Total deferred tax assets 255 319 Less: Valuation allowance ( 38 ) ( 45 ) Deferred tax assets, net of valuation allowance 217 274 Deferred tax liabilities: Intangible assets ( 393 ) ( 369 ) Total deferred tax liabilities ( 393 ) ( 369 ) Net deferred tax liabilities $ ( 176 ) $ ( 95 ) 108 During the fiscal year ended September 30, 2021, the Company utilized a substantial portion of its foreign tax credit carryforwards in the U.S. The current levels of pre-tax income are sufficient to generate the minimum amount of future taxable income needed to support U.S. deferred tax assets realization. During the fiscal year ended September 30, 2020, as a result of final regulations regarding the interest expense allocation rules issued by the Internal Revenue Service in December of 2019, the Company concluded that it is more likely than not that the entire amount of the Company’s deferred tax assets related to foreign tax credits carryforwards in the U.S. will be realized. At September 30, 2021, the Company has no remaining U.S. federal tax net operating loss carryforwards. The Company also has tax net operating loss carryforwards, with no expiration date, in France and Spain of $ 65 million and $ 25 million, respectively, and other tax net operating loss carryforwards in state, local and foreign jurisdictions that expire in various periods. In addition, the Company has foreign tax credit carryforwards for U.S. tax purposes of $ 68 million. The U.S. foreign tax credits will begin to expire in fiscal year 2022. Deferred income taxes have not been recorded on indefinitely reinvested earnings of certain foreign subsidiaries of approximately $ 259 million at September 30, 2021. Distribution of these earnings may result in foreign withholding taxes and U.S. state taxes. However, variables existing if and when remittance occurs make it impracticable to estimate the amount of the ultimate tax liability, if any, on these accumulated foreign earnings. The Company classifies interest and penalties related to uncertain tax position as a component of income tax expense. As of September 30, 2021 and September 30, 2020, the Company had accrued $ 4 million and $ 4 million of interest and penalties, respectively. The following table reflects changes in the gross unrecognized tax benefits, including interest and penalties: Fiscal Year Ended September 30, 2021 2020 2019 (in millions) Gross unrecognized tax benefits - beginning of period $ 12 $ 12 $ 18 Additions for prior year tax positions 3 3 1 Subtractions for prior year tax positions ( 3 ) ( 3 ) ( 7 ) Gross unrecognized tax benefits - end of period $ 12 $ 12 $ 12 Included in the total unrecognized tax benefits at September 30, 2021 and September 30, 2020 are $ 12 million and $ 12 million, respectively, that if recognized, would reduce the effective income tax rate. The Company has determined that it is reasonably possible that the gross unrecognized tax benefits as of September 30, 2021 could decrease by up to approximately $ 2 million related to various ongoing audits and settlement discussions in various foreign jurisdictions during the next twelve months. The Company and its subsidiaries file income tax returns in the U.S. and various foreign jurisdictions. The Company has completed tax audits in the U.S. for tax years ended through September 30, 2013, in the U.K. for the tax years ended through September 30, 2016, in Germany for the tax years ended through September 30, 2014 and in France for the tax years ended through September 30, 2018. The Company is at various stages in the tax audit process in certain foreign and local jurisdictions. 11. Employee Benefit Plans Certain international employees, such as those in Germany and Japan, participate in locally sponsored defined benefit plans, which are not considered to be material either individually or in the aggregate and have a combined projected benefit obligation of approximately $ 83 million and $ 83 million as of September 30, 2021 and September 30, 2020, respectively. Pension benefits under the plans are based on formulas that reflect the employees’ years of service and compensation levels during their employment period. The Company had unfunded pension liabilities relating to these plans of approximately $ 58 million and $ 57 million recorded in its balance sheets as of September 30, 2021 and September 30, 2020, respectively. The Company uses a September 30 measurement date for its plans. For each of the fiscal years ended September 30, 2021, September 30, 2020 and September 30, 2019, pension expense amounted to $ 4 million. Certain employees also participate in defined contribution plans. The Company’s contributions to the defined contribution plans are based upon a percentage of the employees’ elected contributions. The Company’s defined contribution plan expense amounted to approximately $ 9 million for the fiscal year ended September 30, 2021, $ 8 million for the fiscal year ended September 30, 2020 and $ 6 million for the fiscal year ended September 30, 2019. 109 12. Stock-Based Compensation Plans Warner Music Group Corp. 2020 Omnibus Incentive Plan In connection with the IPO, the Company’s board of directors and stockholders approved the Warner Music Group Corp. 2020 Omnibus Incentive Plan, or the “Omnibus Incentive Plan.” The Omnibus Incentive Plan provides for the grant of incentive stock options, restricted stock, restricted stock units (“RSUs”), performance awards and stock appreciation rights to employees, consultants and directors. The aggregate number of shares of common stock authorized for issuance under the Omnibus Incentive Plan is 31,169,099 shares of Class A Common Stock over the 10-year period from the date of adoption, including up to 1,000,000 shares of our Class A Common Stock in connection with the IPO. To date, the Company has issued both RSUs and restricted stock under the Omnibus Incentive Plan. The RSUs were granted to eligible employees and executives, and the restricted stock was granted to members of the Company’s Board of Directors. Except in the case of certain awards issued in connection with the IPO, holders of RSUs and restricted stock are entitled to dividends during the vesting period. As of September 30, 2021, there have been 64,567 shares of Class A Common Stock issued, which includes 64,424 shares of restricted stock issued under the Omnibus Incentive Plan. As of September 30, 2021, there were 31,104,532 shares of Class A Common Stock available to be issued. Warner Music Group Corp. Senior Management Free Cash Flow Plan Effective January 1, 2013, eligible individuals were invited to participate in the Plan. Eligible individuals include any employee, consultant or officer of the Company or any of its affiliates, who is selected by the Company’s Compensation Committee to participate in the Plan. In 2017, the Company’s Compensation Committee invited two additional employees to participate in the Plan. Under the Plan, participants are allocated a specific portion of the Company’s free cash flow to use to purchase the equivalent of Company stock through the acquisition of deferred equity units. Participants also receive a grant of profit interests in a purposely established LLC holding company (the “LLC”) that represent an economic entitlement to future appreciation over an equivalent number of shares of Company stock (“matching units”). The Company’s board of directors authorized the issuance of up to 39,255,429.54 shares of the Company’s common stock pursuant to the Plan, 19,612,714.77 in respect of deferred equity units and 19,612,714.77 in respect of matching units, as adjusted in accordance with the Plan. The LLC currently owns 4,406,819 shares of Class B Common Stock. Each deferred equity unit is equivalent to a share of Company stock. The Company credits units to active participants each Plan year at the time that annual free cash flow bonuses for such Plan year are determined (although certain participants have already received their complete allocations) and may grant unallocated units under the Plan to certain members of current or future management. At the time that annual free cash flow bonuses for such Plan year are determined, a participant is credited a number of deferred equity units based on their respective allocation divided by the grant date intrinsic value and an equal number of the related matching units is vested. The redemption price of the deferred equity units equals the fair market value of a share of the Company’s stock on the date of the settlement and the redemption price for the matching units equals the excess, if any, of the then fair market value of one Company fractional share over the grant date intrinsic value of one share. Dividend distributions, if any, are also paid out on vested deferred equity units and are calculated on the same basis as the Company’s common shares. The Company has applied a graded (tranche-by-tranche) attribution method and expenses stock-based compensation on an accelerated basis over the vesting period of the share award. The Company accounts for stock-based payments as required by ASC 718. ASC 718 requires all stock-based payments to employees to be recognized as compensation expense. Under the recognition provision of ASC 718, liability-classified stock-based compensation costs are measured each reporting date until settlement. The Plan was liability-classified from inception through June 3, 2020, upon completion of the IPO, further discussed herein. For accounting purposes, the grant date was established at the point the Company and the participant reached a mutual understanding of the key terms and conditions, in this case the date at which the participant accepted the invitation to participate in the Plan. For accounting purposes, deferred equity units are deemed to generally vest between one and seven years and matching equity units granted under the Plan are deemed to vest two years after the allocation to the participant’s account. The deferred and matching equity units have cash settlement dates that began in December 2018. Upon the scheduled settlement dates in December 2019 and December 2018, the Company settled 314,631.58 deferred equity units, including special deferred equity units, in cash totaling approximately $ 2 million, 8,359,629.35 in Company shares (which were contributed to the LLC in exchange for Class A units of the LLC) with an estimated value of $ 58 million and 217,312.53 matching equity units in cash totaling approximately $ 1 million. 110 Upon completion of the IPO in June 2020, the Plan was amended to remove the cash-settlement feature on all future redemptions. As a result, all awards previously issued under the Plan required settlement in equity. The participants in such plan were also allowed to sell a pro rata portion, consistent with Access’s percentage reduction in shares of Class B Common Stock as a result of the IPO, of their vested profits interests and acquired units of the LLC holding company, WMG Management Holdings, LLC (“Management LLC”), in the IPO through a “tag-along right.” Under the provision of ASC 718, the Company determined the Plan was modified as of June 3, 2020, and as such, converted the awards from liability-classified to equity-classified. Prior to conversion, the Company performed a final measurement of its stock-based compensation liability under the fair value method. Subsequent to the amendment, the awards issued under the Plan will no longer be adjusted for changes in the value of the Company’s common stock. Upon modification of the Plan, the Company reclassified a $ 769 million stock-based compensation liability to additional paid-in capital, which included $ 57 million associated with the awards settled through the IPO tag-along right on June 5, 2020. The Company will continue to incur non-cash stock-based compensation expense for awards that were unvested as of the modification date of the Plan. In December 2020, all of the outstanding equity interests held by certain participants in the Plan were settled or redeemed in accordance with the terms of the Plan. The Class A and Class B equity units held by certain participants in Management LLC were redeemed in exchange for 18,265,183 shares of Class B Common Stock. These shares of Class B Common Stock converted to shares of Class A Common Stock upon exchange. The Company also issued a total of 4,321,259 additional shares of Class A Common Stock to settle the participants’ remaining deferred equity units previously issued under the Plan. In March 2021, the Compensation Committee of the Board of Directors of the Company approved an amendment to the Plan that allowed certain remaining Plan participants to redeem a portion of their vested Class B equity units of Management LLC. These Class B equity units were redeemed in exchange for a total of 968,920 shares of Class B Common Stock, which shares of Class B Common Stock converted to shares of Class A Common Stock upon the exchange. The following table summarizes the activity for the Company’s unvested share awards under the Plan: Deferred Equity Units Matching Equity Units Deferred Equity Units Weighted-Average Intrinsic Value Matching Equity Units Weighted-Average Intrinsic Value Deferred Equity Units Weighted-Average Grant-Date Intrinsic Value Matching Equity Units Weighted-Average Grant-Date Intrinsic Value Unvested units at September 30, 2019 1,900,747 6,681,397 $ 7.71 $ 4.60 $ 3.13 $ — Granted — — — — — — Vested ( 1,351,293 ) ( 2,369,536 ) 27.01 24.04 23.91 — Forfeited — — — — — — Unvested units at September 30, 2020 549,454 4,311,861 $ 27.01 $ 23.82 $ 23.82 $ — Granted — — — — — — Vested ( 549,454 ) ( 2,303,578 ) 44.21 41.02 41.02 — Forfeited — — — — — — Unvested units at September 30, 2021 — 2,008,283 $ — $ 41.02 $ — $ — As of September 30, 2021, there were no remaining unvested deferred equity unit awards outstanding. The weighted-average grant date intrinsic value of deferred equity unit awards for the fiscal year ended September 30, 2020 was $ 23.82 . The fair value of these deferred equity units at September 30, 2020 was $ 27.01 . The weighted-average grant date intrinsic value of deferred equity unit awards for the fiscal year ended September 30, 2019 was $ 3.13 . The fair value of these deferred equity units at September 30, 2019 was $ 7.71 . As September 30, 2021, 2020 and 2019, the Company had approximately $ 4 million, $ 14 million and $ 16 million, respectively, of unrecognized compensation costs related to its unvested share awards. As of September 30, 2021, the remaining weighted-average period over which total compensation related to unvested awards is expected to be recognized is less than 1 year. 111 Restricted Stock Units The following table summarizes the activity for the Company’s unvested RSUs: Number of Share Units Weighted-Average Grant Date Fair Value Aggregate Intrinsic Value (in thousands) Unvested and outstanding balance as of September 30, 2020 — $ — $ — Granted 1,604,922 32.23 Vested ( 217 ) 36.87 Forfeited/canceled ( 69,338 ) 30.83 Unvested and outstanding balance as of September 30, 2021 1,535,367 $ 32.29 $ 67,879 As of September 30, 2021, total unrecognized compensation cost related to unvested RSUs was approximately $ 26 million, which is expected to be recognized over a weighted-average period of approximately 2.9 years. The Company expects to satisfy the vesting of RSUs by issuing new shares of its Class A Common Stock. Stock-Based Compensation Expense Stock-based compensation expense is included in the consolidated statements of operations as selling, general and administrative expenses. The Company recognized non-cash stock-based compensation expense of $ 45 million and free cash flow compensation expense of $ 5 million for the fiscal year ended September 30, 2021. The Company recognized non-cash stock-based compensation expense of $ 608 million, free cash flow compensation expense of $ 16 million and dividend expense related to the equity units of $ 1 million for the fiscal year ended September 30, 2020. The Company recognized non-cash stock-based compensation expense of $ 50 million, free cash flow compensation expense of $ 15 million and dividend expense related to the equity units of $ 7 million for the fiscal year ended September 30, 2019. 13. Related Party Transactions Management Agreement Upon completion of the Merger, the Company and Holdings entered into the Management Agreement, dated as of the Merger Closing Date, pursuant to which Access provided the Company and its subsidiaries with financial, investment banking, management, advisory and other services. Pursuant to the Management Agreement, the Company paid to Access an annual fee on quarterly basis and reimbursed Access for certain expenses incurred performing services under the agreement. The Company and Holdings agreed to indemnify Access and certain of its affiliates against all liabilities arising out of performance of the Management Agreement. As a result of the completion of the IPO, the Management Agreement terminated in accordance with its terms and the Company paid to Access a one-time termination fee and a fee for transaction services in an aggregate amount of $ 60 million. The Company recorded these fees within selling, general and administrative expenses in the consolidated statements of operations for the fiscal year ended September 30, 2020. As the Management Agreement was terminated in June 2020, the Company incurred no costs associated with the Management Agreement for the fiscal year ended September 30, 2021. Prior to the termination of the Management Agreement, the Company incurred costs associated with the Management Agreement of approximately $ 7 million and $ 11 million for the fiscal years ended September 30, 2020 and September 30, 2019, respectively. Such amounts have been included as a component of selling, general and administrative expense in the accompanying consolidated statements of operations. Lease Arrangements with Related Parties On March 29, 2019, an affiliate of Access acquired the Ford Factory Building, located on 777 S. Santa Fe Avenue in Los Angeles, California from an unaffiliated third party. The building is the Company’s new Los Angeles, California headquarters and as such, the Company is the sole tenant of the building acquired by Access. The existing lease agreement was assumed by Access upon purchase of the building and was not modified as a result of the purchase. Rental payments by the Company under the existing lease for the fiscal 2021 year were approximately $ 13 million and are subject to annual fixed increases throughout the remainder of the lease term. The remaining lease term is approximately 9 years, after which the Company may exercise a single option to extend the term of the lease for 10 years thereafter. 112 On July 29, 2014, AI Wrights Holdings Limited, an affiliate of Access, entered into a lease and related agreements with Warner Chappell Music Limited and WMG Acquisition (UK) Limited, subsidiaries of the Company, for the lease of 27 Wrights Lane, Kensington, London. The Company had been the tenant of the building which Access acquired. Subsequent to the change in ownership, the parties entered into the lease and related agreements pursuant to which, on January 1, 2015, the rent was increased to £ 3,460,250 per year and the term was extended for an additional five years from December 24, 2020 to December 24, 2025, with a market rate rent review which began on December 25, 2020. License Agreements with Deezer Access owns an equity interest in Deezer S.A., which was formerly known as Odyssey Music Group (“Odyssey”), a French company that controls and operates a music streaming service, formerly through Odyssey’s subsidiary, Blogmusik SAS (“Blogmusik”), under the name Deezer (“Deezer”), and is represented on Deezer S.A.’s Board of Directors. Subsidiaries of the Company have been a party to license arrangements with Deezer since 2008, which provide for the use of the Company’s sound recordings on Deezer’s ad-supported and subscription streaming services worldwide (excluding China, North Korea, and Japan (included for subscription services only)) in exchange for fees paid by Deezer. The Company has also authorized Deezer to include the Company’s sound recordings in Deezer’s streaming services where such services are offered as a bundle with third-party services or products (e.g., telco services or hardware products), for which Deezer is also required to make payments to the Company. Deezer paid to the Company an aggregate amount of approximately $ 42 million, $ 42 million and $ 49 million in connection with the foregoing arrangements during the fiscal years ended September 30, 2021, 2020 and 2019, respectively. In addition, in connection with these arrangements, (i) the Company was issued, and currently holds, warrants to purchase shares of Deezer S.A. and (ii) the Company purchased a small number of shares of Deezer S.A., which collectively represent a small minority interest in Deezer S.A. The Company also has various publishing agreements with Deezer. Warner Chappell has licenses with Deezer for use of repertoire on the service in Europe, which the Company refers to as a PEDL license (referencing the Company’s Pan European Digital Licensing initiative), and for territories in Latin America. For the PEDL and Latin American licenses for the fiscal years ended September 30, 2021, 2020 and 2019, Deezer paid the Company an additional approximately $ 2 million, $ 2 million and $ 1 million, respectively. Deezer also licenses other publishing rights controlled by Warner Chappell through statutory licenses or through various collecting societies. Investment in Tencent Music Entertainment Group On October 1, 2018, WMG China LLC (“WMG China”), an affiliate of the Company, entered into a share subscription agreement with Tencent Music Entertainment Group pursuant to which WMG China purchased 37,162,288 ordinary shares of Tencent Music Entertainment Group for $ 100 million. WMG China is 80 % owned by AI New Holdings 5 LLC, an affiliate of Access, and 20 % owned by the Company. On November 4, 2021, WMG China distributed to the Company, the Company’s equity interest in Tencent Music Entertainment Group. 14. Commitments and Contingencies Talent Advances The Company routinely enters into long-term commitments with recording artists, songwriters and publishers for the future delivery of music. Such commitments generally become due only upon delivery and Company acceptance of albums from the recording artists or future musical compositions from songwriters and publishers. Additionally, such commitments are typically cancellable at the Company’s discretion, generally without penalty. Based on contractual obligations and the Company’s expected release schedule, aggregate firm commitments to such talent approximated $ 537 million and $ 442 million as of September 30, 2021 and September 30, 2020, respectively. Other Other off-balance sheet firm commitments, which primarily include minimum funding commitments to investees, amounted to approximately $ 23 million and $ 12 million at September 30, 2021 and September 30, 2020, respectively. 113 Litigation The Company is involved in various litigation and regulatory proceedings arising in the normal course of business. Where it is determined, in consultation with counsel based on litigation and settlement risks, that a loss is probable and estimable in a given matter, the Company establishes an accrual. In the currently pending proceedings, the amount of accrual is not material. An estimate of the reasonably possible loss or range of loss in excess of the amounts already accrued cannot be made at this time due to various factors typical in contested proceedings, including (1) the results of ongoing discovery; (2) uncertain damage theories and demands; (3) a less than complete factual record; (4) uncertainty concerning legal theories and their resolution by courts or regulators; and (5) the unpredictable nature of the opposing party and its demands. However, the Company cannot predict with certainty the outcome of any litigation or the potential for future litigation. As such, the Company continuously monitors these proceedings as they develop and adjusts any accrual or disclosure as needed. Regardless of the outcome, litigation could have an adverse impact on the Company, including the Company’s brand value, because of defense costs, diversion of management resources and other factors and it could have a material effect on the Company’s results of operations for a given reporting period. 15. Derivative Financial Instruments The Company uses derivative financial instruments, primarily foreign currency forward exchange contracts and interest rate swaps, for the purposes of managing foreign currency exchange rate risk and interest rate risk on expected future cash flows. However, the Company may choose not to hedge certain exposures for a variety of reasons including, but not limited to, accounting considerations and the prohibitive economic cost of hedging particular exposures. There can be no assurance the hedges will offset more than a portion of the financial impact resulting from movements in foreign currency exchange or interest rates. The Company enters into foreign currency forward exchange contracts primarily to hedge the risk that unremitted or future royalties and license fees owed to its U.S. companies for the sale or licensing of U.S.-based music and merchandise abroad may be adversely affected by changes in foreign currency exchange rates. The Company focuses on managing the level of exposure to the risk of foreign currency exchange rate fluctuations on its major currencies, which include the Euro, British pound sterling, Japanese yen, Canadian dollar, Swedish krona, Australian dollar, Brazilian real, Korean won and Norwegian krone. The Company also may at times choose to hedge foreign currency risk associated with financing transactions such as third-party debt and other balance sheet items. The Company’s foreign currency forward exchange contracts have not been designated as hedges under the criteria prescribed in ASC 815. The Company records these contracts at fair value on its balance sheet and the related gains and losses are immediately recognized in the consolidated statement of operations where there is an offsetting entry related to the underlying exposure. The Company has entered into, and in the future may enter into, interest rate swaps to manage interest rate risk. These instruments may offset a portion of changes in income or expense, or changes in fair value of the Company’s long-term debt. The interest rate swap instruments are designated and qualify as cash flow hedges under the criteria prescribed in ASC 815. The Company records these contracts at fair value on its balance sheet and gains or losses on these contracts are deferred in equity (as a component of comprehensive income (loss)). The fair value of foreign currency forward exchange contracts is determined by using observable market transactions of spot and forward rates (i.e., Level 2 inputs) which is discussed further in Note 18. Additionally, netting provisions are provided for in existing International Swap and Derivative Association Inc. agreements in situations where the Company executes multiple contracts with the same counterparty. As a result, net assets or liabilities resulting from foreign exchange derivatives subject to these netting agreements are classified within other current assets or other current liabilities in the Company’s consolidated balance sheets. The Company’s hedged interest rate transactions as of September 30, 2021 are expected to be recognized within three years . The fair value of interest rate swaps is based on dealer quotes of market rates (i.e., Level 2 inputs) which is discussed further in Note 18. Interest income or expense related to interest rate swaps is recognized in interest income (expense), net in the same period as the related expense is recognized. The ineffective portions of interest rate swaps are recognized in other income (expense) in the period measured. The Company monitors its positions with, and the credit quality of, the financial institutions that are party to any of its financial transactions. As of September 30, 2021, the Company had no outstanding hedge contracts and no deferred gains or losses in comprehensive loss related to foreign exchange hedging. As of September 30, 2020, the Company had no outstanding hedge contracts and no deferred gains or losses in comprehensive loss related to foreign exchange hedging. 114 As of September 30, 2021, the Company had outstanding $ 820 million in pay-fixed receive-variable interest rate swaps with $ 17 million of unrealized deferred losses in comprehensive loss related to the interest rate swaps. As of September 30, 2020, the Company had outstanding $ 820 million in pay-fixed receive-variable interest rate swaps with $ 29 million of unrealized deferred losses in comprehensive income related to the interest rate swaps. The Company recorded realized pre-tax losses of $ 3 million related to its foreign currency forward exchange contracts in the consolidated statement of operations as other expense for the fiscal year ended September 30, 2021. The Company recorded realized pre-tax losses of $ 4 million related to its foreign currency forward exchange contracts in the consolidated statement of operations as other income for the fiscal year ended September 30, 2020. The unrealized pre-tax losses of the Company’s derivative interest rate swaps designated as cash flow hedges recorded in other comprehensive income during the fiscal year ended September 30, 2021 were $ 15 million. The unrealized pre-tax losses of the Company’s derivative interest rate swaps designated as cash flow hedges recorded in other comprehensive loss during the fiscal year ended September 30, 2020 were $ 27 million. The following is a summary of amounts recorded in the consolidated balance sheets pertaining to the Company’s derivative instruments at September 30, 2021 and September 30, 2020: September 30, 2021 (a) September 30, 2020 (b) (in millions) Other noncurrent assets $ — $ — Other noncurrent liabilities ( 22 ) ( 38 ) ______________________________________ (a) $ 22 million of interest rate swaps in liability positions. (b) $ 38 million of interest rate swaps in liability positions. 16. Segment Information As discussed more fully in Note 1, based on the nature of its products and services, the Company classifies its business interests into two fundamental operations: Recorded Music and Music Publishing, which also represent the reportable segments of the Company. Information as to each of these operations is set forth below. The Company evaluates performance based on several factors, of which the primary financial measure is operating income (loss) before non-cash depreciation of tangible assets and non-cash amortization of intangible assets (“OIBDA”). The Company has supplemented its analysis of OIBDA results by segment with an analysis of operating income (loss) by segment. The accounting policies of the Company’s business segments are the same as those described in the summary of significant accounting policies included elsewhere herein. The Company accounts for intersegment sales at fair value as if the sales were to third parties. While intercompany transactions are treated like third-party transactions to determine segment performance, the revenues (and corresponding expenses recognized by the segment that is counterparty to the transaction) are eliminated in consolidation, and therefore, do not themselves impact consolidated results. 115 Recorded Music Music Publishing Corporate expenses and eliminations Total (in millions) 2021 Revenues $ 4,544 $ 761 $ ( 4 ) $ 5,301 Operating income (loss) 733 89 ( 213 ) 609 Amortization of intangible assets 150 79 — 229 Depreciation of property, plant and equipment 53 6 18 77 OIBDA 936 174 ( 195 ) 915 Total assets 3,278 2,843 1,090 7,211 Capital expenditures 33 1 59 93 2020 Revenues $ 3,810 $ 657 $ ( 4 ) $ 4,463 Operating income (loss) 175 81 ( 485 ) ( 229 ) Amortization of intangible assets 119 71 — 190 Depreciation of property, plant and equipment 55 5 11 71 OIBDA 349 157 ( 474 ) 32 Total assets 2,483 2,656 1,271 6,410 Capital expenditures 28 1 56 85 2019 Revenues $ 3,840 $ 643 $ ( 8 ) $ 4,475 Operating income (loss) 439 92 ( 175 ) 356 Amortization of intangible assets 139 69 — 208 Depreciation of property, plant and equipment 45 5 11 61 OIBDA 623 166 ( 164 ) 625 Capital expenditures 29 3 72 104 Revenues relating to operations in different geographical areas are set forth below for the fiscal years ended September 30, 2021, September 30, 2020 and September 30, 2019. Total long-lived assets relating to operations in different geographical areas, which consist of property, plant and equipment, net and operating lease right-of-use assets, net, are set forth below as of September 30, 2021 and September 30, 2020. 2021 2020 2019 Revenues Long-lived Assets Revenues Long-lived Assets Revenues (in millions) United States $ 2,363 $ 439 $ 1,934 $ 426 $ 1,956 Germany 662 52 511 43 504 United Kingdom 620 43 551 49 596 All other territories 1,656 98 1,467 86 1,419 Total $ 5,301 $ 632 $ 4,463 $ 604 $ 4,475 Customer Concentration In the fiscal year ended September 30, 2021, the Company had three customers, Spotify, Apple and YouTube, that individually represented 10% or more of total revenues, whereby Spotify represented 18 %, Apple represented 13 % and YouTube represented 11 % of total revenues. In the fiscal year ended September 30, 2020, the Company had two customers, Spotify and Apple, that individually represented 10% or more of total revenues, whereby Spotify represented 17 % and Apple represented 14 % of total revenues. In the fiscal year ended September 30, 2019, the Company had two customers, Spotify and Apple, that individually represented 10% or more of total revenues, whereby Spotify represented 14 % and Apple represented 13 % of total revenues. These customers’ revenues are included in both the Company’s Recorded Music and Music Publishing segments and the Company expects that the Company’s license agreements with these customers will be renewed in the normal course of business. 116 17. Additional Financial Information Cash Interest and Taxes The Company made interest payments of approximately $ 137 million, $ 128 million and $ 138 million during the fiscal years ended September 30, 2021, September 30, 2020 and September 30, 2019, respectively. The Company paid approximately $ 124 million, $ 81 million and $ 63 million of income and withholding taxes, net of refunds, for the fiscal years ended September 30, 2021, September 30, 2020 and September 30, 2019, respectively. Dividends The Company’s ability to pay dividends may be restricted by covenants in the credit agreement for the Revolving Credit Facility which are currently suspended but which will be reinstated if Acquisition Corp.’s Total Indebtedness to EBITDA Ratio increases above 3.50 :1.00 and the term loans do not achieve an investment grade rating. The Company intends to pay quarterly cash dividends to holders of its Class A Common Stock and Class B Common Stock. The declaration of each dividend will continue to be at the discretion of the Company’s board of directors and will depend on the Company’s financial condition, earnings, liquidity and capital requirements, level of indebtedness, contractual restrictions with respect to payment of dividends, restrictions imposed by Delaware law, general business conditions and any other factors that the Company’s board of directors deems relevant in making such a determination. Therefore, there can be no assurance that the Company will pay any dividends to holders of the Company’s common stock, or as to the amount of any such dividends. On August 13, 2021, the Company’s board of directors declared a cash dividend of $ 0.15 per share on the Company’s Class A Common Stock and Class B Common Stock, as well as related payments under certain stock-based compensation plans, which was paid on September 1, 2021. The Company paid cash dividends to stockholders and participating security holders of $ 265 million, $ 344 million and $ 94 million for the fiscal years ended September 30, 2021, 2020 and 2019, respectively. On November 9, 2021, the Company’s board of directors declared a cash dividend of $ 0.15 per share on the Company’s Class A Common Stock and Class B Common Stock, as well as related payments under certain stock-based compensation plans, payable on December 1, 2021 to stockholders of record as of the close of business on November 23, 2021. COVID-19 Pandemic On March 11, 2020, the COVID-19 outbreak was declared a global pandemic by the World Health Organization. Government-imposed mandates limiting public assembly and restrictions on non-essential businesses have adversely impacted the Company’s operations for the fiscal year ended September 30, 2021, including touring and live events. As global vaccination efforts are underway and businesses are beginning to reopen, revenues improved due to the partial recovery of certain COVID-19 impacted revenue streams despite a rise in COVID-19 cases associated with the Delta variant. The continued impact of COVID-19, including increases in infection rates, new variants, renewed governmental action to slow the spread of COVID-19 and to what extent it will impact the Company’s music and related services cannot be predicted. The Company is not presently aware of any events or circumstances arising from the global pandemic that would require us to update any estimates, judgments or materially revise the carrying value of our assets or liabilities. The Company’s estimates may change, however, as new events occur and additional information is obtained, and any such changes will be recognized in the consolidated financial statements. Actual results could differ from estimates, and any such differences may be material to our consolidated financial statements. 18. Fair Value Measurements ASC 820, Fair Value Measurement (“ASC 820”) defines fair value as the price that would be received upon sale of an asset or paid upon transfer of a liability in an orderly transaction between market participants at the measurement date and in the principal or most advantageous market for that asset or liability. The fair value should be calculated based on assumptions that market participants would use in pricing the asset or liability, not on assumptions specific to the entity. In addition to defining fair value, ASC 820 expands the disclosure requirements around fair value and establishes a fair value hierarchy for valuation inputs. The hierarchy prioritizes the inputs into three levels based on the extent to which inputs used in measuring fair value are observable in the market. Each fair value measurement is reported in one of the three levels which is determined by the lowest level input that is significant to the fair value measurement in its entirety. These levels are: 117 • Level 1—inputs are based upon unadjusted quoted prices for identical instruments traded in active markets. • Level 2—inputs are based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active and model-based valuation techniques for which all significant assumptions are observable in the market or can be corroborated by observable market data for substantially the full term of the assets or liabilities. • Level 3—inputs are generally unobservable and typically reflect management’s estimates of assumptions that market participants would use in pricing the asset or liability. The fair values are therefore determined using model-based techniques that include option pricing models, discounted cash flow models and similar techniques. In accordance with the fair value hierarchy, described above, the following tables show the fair value of the Company’s financial instruments that are required to be measured at fair value as of September 30, 2021 and September 30, 2020. Fair Value Measurements as of September 30, 2021 (Level 1) (Level 2) (Level 3) Total (in millions) Other Current Liabilities: Contractual Obligations (a) $ — $ — $ ( 4 ) $ ( 4 ) Other Noncurrent Assets: Equity Method Investment (b) 26 — — 26 Equity Investment with Readily Determinable Fair Value (c) 37 — — 37 Other Noncurrent Liabilities: Contractual Obligations (a) — — ( 15 ) ( 15 ) Interest Rate Swaps (d) — ( 22 ) — ( 22 ) Total $ 63 $ ( 22 ) $ ( 19 ) $ 22 Fair Value Measurements as of September 30, 2020 (Level 1) (Level 2) (Level 3) Total (in millions) Other Current Liabilities: Contractual Obligations (a) $ — $ — $ ( 2 ) $ ( 2 ) Other Noncurrent Assets: Equity Method Investment (b) — 47 — 47 Other Noncurrent Liabilities: Contractual Obligations (a) — — ( 4 ) ( 4 ) Interest Rate Swaps (d) — ( 38 ) — ( 38 ) Total $ — $ 9 $ ( 6 ) $ 3 ______________________________________ (a) This represents contingent consideration related to a fiscal 2020 acquisition. This is based on a probability weighted performance approach and it is adjusted to fair value on a recurring basis and any adjustments are typically included as a component of operating income in the consolidated statements of operations. This amount was mainly calculated using unobservable inputs such as future earnings performance of the acquiree and the expected timing of the payment. (b) This represents an equity method investment acquired in fiscal 2019 whereby the Company has elected the fair value option under ASC 825, Financial Instruments (“ASC 825”). The valuation is based upon quoted prices in active markets. (c) This represents an equity investment with a readily determinable fair value that was acquired and subsequently became publicly traded during the fiscal year ended September 30, 2021. The Company has measured its investment to fair value in accordance with ASC 321, Investments—Equity Securities, based on quoted prices in active markets. The Company recognized an unrealized gain on this equity investment of $ 17 million for the fiscal year ended September 30, 2021, which was recorded as other income in the consolidated statements of operations. (d) The fair value of the interest rate swaps is based on dealer quotes of market forward rates and reflects the amount that the Company would receive or pay as of September 30, 2021 for contracts involving the same attributes and maturity dates. 118 The following table reconciles the beginning and ending balances of net liabilities classified as Level 3: Total (in millions) Balance at September 30, 2020 $ ( 6 ) Additions ( 13 ) Reductions — Payments — Balance at September 30, 2021 $ ( 19 ) Additions to net liabilities during the fiscal year ended September 30, 2021 include a measurement period adjustment of $ 7 million to contingent consideration for a fiscal 2020 acquisition. The majority of the Company’s non-financial instruments, which include goodwill, intangible assets, inventories and property, plant and equipment, are not required to be re-measured to fair value on a recurring basis. These assets are evaluated for impairment if certain triggering events occur. If such evaluation indicates that impairment exists, the asset is written down to its fair value. In addition, an impairment analysis is performed at least annually for goodwill and indefinite-lived intangible assets. Equity Investments Without Readily Determinable Fair Value The Company evaluates its equity investments without readily determinable fair values for impairment if factors indicate that a significant decrease in value has occurred. The Company has elected to use the measurement alternative to fair value that will allow these investments to be recorded at cost, less impairment, and adjusted for subsequent observable price changes. The Company did not record any impairment charges on these investments during the fiscal year ended September 30, 2021. In addition, there were no observable price changes events that were completed during the fiscal year ended September 30, 2021. Fair Value of Debt Based on the level of interest rates prevailing at September 30, 2021, the fair value of the Company’s debt was $ 3.412 billion. Based on the level of interest rates prevailing at September 30, 2020, the fair value of the Company’s debt was $ 3.137 billion. The fair value of the Company’s debt instruments is determined using quoted market prices from less active markets or by using quoted market prices for instruments with identical terms and maturities; both approaches are considered a Level 2 measurement. 19. Subsequent Events 3.750 % Senior Secured Notes Offering On November 17, 2021, Acquisition Corp. priced $ 540 million in aggregate principal amount of its 3.750 % Senior Secured Notes due 2029 (the “ 3.750 % Senior Secured Notes”). We expect the issuance to close on November 24, 2021. Net proceeds of the offering are expected to be used to fund a portion of the aggregate cash consideration for potential acquisitions of certain music and music-related assets, or if any of such potential acquisitions are not completed, for general corporate purposes. The Company may also use the net proceeds of the Offering to redeem all or a portion of the 3.750 % Senior Secured Notes (so long as, in the case of a partial redemption, at least $ 250 million of the 3.750 % Senior Secured Notes remain outstanding following such redemption) at any time on one or more occasions on or prior to the fifth business day following December 20, 2021 by giving notice at least five business days prior to such time at the special optional redemption price equal to the issue price of the 3.750 % Senior Secured Notes plus 1 % of the principal amount thereof together with accrued and unpaid interest on such 3.750 % Senior Secured Notes from the date of issuance to but excluding the redemption date. Interest on the 3.750 % Senior Secured Notes will accrue at the rate of 3.750 % per annum and will be payable semi-annually in arrears on June 1 and December 1, commencing on June 1, 2022. The 3.750 % Senior Secured Notes are fully and unconditionally guaranteed on a senior secured basis by each of Acquisition Corp.’s existing direct or indirect wholly-owned domestic restricted subsidiaries and by any such subsidiaries that guarantee obligations of Acquisition Corp. under its existing credit facilities, subject to customary exceptions. The indenture governing the 3.750 % Senior Secured Notes contains covenants limiting, among other things, Acquisition Corp.’s ability and the ability of most of its subsidiaries to create liens and consolidate, merge, sell or otherwise dispose of all or substantially all of its assets. 119 WARNER MUSIC GROUP CORP. Schedule II — Valuation and Qualifying Accounts Description Balance at Beginning of Period Additions Charged to Cost and Expenses Deductions Balance at End of Period (in millions) Fiscal Year Ended September 30, 2021 Allowance for doubtful accounts $ 23 $ 1 $ ( 4 ) $ 20 Reserves for sales returns 24 53 ( 54 ) 23 Allowance for deferred tax asset 45 2 ( 9 ) 38 Fiscal Year Ended September 30, 2020 Allowance for doubtful accounts $ 17 $ 11 $ ( 5 ) $ 23 Reserves for sales returns 23 66 ( 65 ) 24 Allowance for deferred tax asset 91 1 ( 47 ) 45 Fiscal Year Ended September 30, 2019 Allowance for doubtful accounts $ 18 $ 3 $ ( 4 ) $ 17 Reserves for sales returns 28 88 ( 93 ) 23 Allowance for deferred tax asset 206 4 ( 119 ) 91 120 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None.