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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2018
Or 
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from              to             
Commission file number: 001-32877
 
malogo.jpg
 
Mastercard Incorporated
(Exact name of registrant as specified in its charter)
 
Delaware
13-4172551
(State or other jurisdiction of
incorporation or organization)
(IRS Employer
Identification Number)
 
 
2000 Purchase Street
10577
Purchase, NY
(Zip Code)
(Address of principal executive offices)
 
(914) 249-2000
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x     No  o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check One):
Large accelerated filer
 
x
  
Accelerated filer
 
o  
 
 
 
 
 
Non-accelerated filer
 
o  (do not check if a smaller reporting company)
  
Smaller reporting company
 
o
 
 
 
 
 
 
 
 
 
 
 
Emerging growth company
 
o
 
 
 
 
 
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13 (a) of the Exchange Act.
 
o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  Yes  o    No  x
As of April 27, 2018, there were 1,030,195,248 shares outstanding of the registrant’s Class A common stock, par value $0.0001 per share; and 13,775,789 shares outstanding of the registrant’s Class B common stock, par value $0.0001 per share.
 


MASTERCARD INCORPORATED
FORM 10-Q

TABLE OF CONTENTS
 
 
Page
 
 
 
 
 
 
 
 
 
 



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In this Report on Form 10-Q (“Report”), references to the “Company,” “Mastercard,” “we,” “us” or “our” refer to the Mastercard brand generally, and to the business conducted by Mastercard Incorporated and its consolidated subsidiaries, including our operating subsidiary, Mastercard International Incorporated.
Forward-Looking Statements
This Report contains forward-looking statements pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical facts may be forward-looking statements. When used in this Report, the words “believe”, “expect”, “could”, “may”, “would”, “will”, “trend” and similar words are intended to identify forward-looking statements. Examples of forward-looking statements include, but are not limited to, statements that relate to the Company’s future prospects, developments and business strategies.
Many factors and uncertainties relating to our operations and business environment, all of which are difficult to predict and many of which are outside of our control, influence whether any forward-looking statements can or will be achieved. Any one of those factors could cause our actual results to differ materially from those expressed or implied in writing in any forward-looking statements made by Mastercard or on its behalf, including, but not limited to, the following factors:
•
direct regulation of the payments industry (including regulatory, legislative and litigation activity with respect to interchange fees, surcharging and the extension of current regulatory activity to additional jurisdictions or products)
•
the impact of preferential or protective government actions
•
regulation to which we are directly or indirectly subject based on our participation in the payments industry (including anti-money laundering and economic sanctions, financial sector oversight, real-time account-based payment systems, issuer practice regulation and regulation of internet and digital transactions)
•
the impact of changes in laws, including the recent U.S. tax legislation, regulations and interpretations thereof, or challenges to our tax positions
•
regulation of privacy, data protection and security
•
potential or incurred liability and limitations on business resulting from litigation
•
the impact of competition in the global payments industry (including disintermediation and pricing pressure)
•
the challenges relating to rapid technological developments and changes
•
the challenges relating to operating an account-based payment system in addition to our core network and to working with new customers and end users
•
the impact of information security incidents, account data breaches, fraudulent activity, or service disruptions on our business
•
issues related to our relationships with our financial institution customers (including loss of substantial business from significant customers, competitor relationships with our customers and banking industry consolidation)
•
the impact of our relationships with other stakeholders, including merchants and governments
•
exposure to loss or illiquidity due to settlement guarantees and other significant third-party obligations
•
the impact of global economic and political events and conditions (including global financial market activity, declines in cross-border activity, negative trends in consumer spending, the effect of adverse currency fluctuation and the effects of the U.K.’s proposed withdrawal from the E.U.)
•
reputational impact, including impact related to brand perception
•
issues related to acquisition integration, strategic investments and entry into new businesses
•
issues related to our Class A common stock and corporate governance structure
Please see a complete discussion of these risk factors in Part I, Item 1A - Risk Factors of the Company’s Annual Report on Form 10-K for the year ended December 31, 2017. We caution you that the important factors referenced above may not contain all of the factors that are important to you. Our forward-looking statements speak only as of the date of this Report or as of the date they are made, and we undertake no obligation to update our forward-looking statements.


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PART I — FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

MASTERCARD INCORPORATED
CONSOLIDATED BALANCE SHEET
(UNAUDITED) 
 
March 31, 2018
 
December 31, 2017
 
(in millions, except per share data)
ASSETS
 
 
 
Cash and cash equivalents
$
6,890

 
$
5,933

Restricted cash for litigation settlement
548

 
546

Investments
1,378

 
1,849

Accounts receivable
2,122

 
1,969

Settlement due from customers
1,531

 
1,375

Restricted security deposits held for customers
965

 
1,085

Prepaid expenses and other current assets
1,273

 
1,040

Total Current Assets
14,707

 
13,797

Property, plant and equipment, net of accumulated depreciation of $748 and $714, respectively
839

 
829

Deferred income taxes
350

 
250

Goodwill
3,104

 
3,035

Other intangible assets, net of accumulated amortization of $1,173 and $1,157, respectively
1,118

 
1,120

Other assets
2,826

 
2,298

Total Assets
$
22,944

 
$
21,329

LIABILITIES, REDEEMABLE NON-CONTROLLING INTERESTS AND EQUITY
 
 
 
Accounts payable
$
370

 
$
933

Settlement due to customers
1,280

 
1,343

Restricted security deposits held for customers
965

 
1,085

Accrued litigation
828

 
709

Accrued expenses
4,501

 
3,931

Other current liabilities
1,004

 
792

Total Current Liabilities
8,948

 
8,793

Long-term debt
6,469

 
5,424

Deferred income taxes
64

 
106

Other liabilities
1,661

 
1,438

Total Liabilities
17,142

 
15,761

 
 
 
 
Commitments and Contingencies

 

 
 
 
 
Redeemable Non-controlling Interests
71

 
71

 
 
 
 
Stockholders’ Equity

 

Class A common stock, $0.0001 par value; authorized 3,000 shares, 1,384 and 1,382 shares issued and 1,034 and 1,040 outstanding, respectively
—

 
—

Class B common stock, $0.0001 par value; authorized 1,200 shares, 14 and 14 issued and outstanding, respectively
—

 
—

Additional paid-in-capital
4,367

 
4,365

Class A treasury stock, at cost, 350 and 342 shares, respectively
(22,143
)
 
(20,764
)
Retained earnings
23,852

 
22,364

Accumulated other comprehensive income (loss)
(373
)
 
(497
)
Total Stockholders’ Equity
5,703

 
5,468

Non-controlling interests
28

 
29

Total Equity
5,731

 
5,497

Total Liabilities, Redeemable Non-controlling Interests and Equity
$
22,944

 
$
21,329

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


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MASTERCARD INCORPORATED
CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)


 
 
Three Months Ended March 31,
 
2018
 
2017
 
(in millions, except per share data)
Net Revenue
$
3,580

 
$
2,734

Operating Expenses
 
 
 
General and administrative
1,294

 
951

Advertising and marketing
224

 
170

Depreciation and amortization
120

 
92

Provision for litigation settlements
117

 
15

Total operating expenses
1,755

 
1,228

Operating income
1,825

 
1,506

Other Income (Expense)
 
 
 
Investment income
17

 
15

Interest expense
(43
)
 
(39
)
Other income (expense), net
4

 
(4
)
Total other income (expense)
(22
)
 
(28
)
Income before income taxes
1,803

 
1,478

Income tax expense
311

 
397

Net Income
$
1,492

 
$
1,081

 
 
 
 
Basic Earnings per Share
$
1.42

 
$
1.00

Basic Weighted-Average Shares Outstanding
1,051

 
1,078

Diluted Earnings per Share
$
1.41

 
$
1.00

Diluted Weighted-Average Shares Outstanding
1,057

 
1,082


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


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MASTERCARD INCORPORATED
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(UNAUDITED)

 
 
Three Months Ended March 31,
 
 
2018
 
2017
 
(in millions)
Net Income
 
$
1,492

 
$
1,081

Other comprehensive income (loss):
 
 
 
 
Foreign currency translation adjustments
 
161

 
86

Income tax effect
 
(2
)
 
(1
)
Foreign currency translation adjustments, net of income tax effect
 
159

 
85

 
 
 
 
 
Translation adjustments on net investment hedge
 
(45
)
 
(34
)
Income tax effect
 
12

 
12

Translation adjustments on net investment hedge, net of income tax effect
 
(33
)
 
(22
)
 
 
 
 
 
Defined benefit pension and other postretirement plans
 
(1
)
 
(2
)
Income tax effect
 
—

 
1

Defined benefit pension and other postretirement plans, net of income tax effect
 
(1
)
 
(1
)
 
 
 
 
 
Investment securities available-for-sale
 
(1
)
 
(1
)
Income tax effect
 
—

 
—

Investment securities available-for-sale, net of income tax effect
 
(1
)
 
(1
)
 
 
 
 
 
Other comprehensive income (loss), net of tax
 
124

 
61

Comprehensive Income
 
$
1,616

 
$
1,142


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



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MASTERCARD INCORPORATED
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
(UNAUDITED)
 
Stockholders’ Equity
 
 
 
 
 
Common Stock
 
Additional
Paid-In
Capital
 
Class A
Treasury
Stock
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Non-
Controlling
Interests
 
Total Equity
 
Class A
 
Class B
 
 
 
 
(in millions, except per share data)
Balance at December 31, 2017
$
—

 
$
—

 
$
4,365

 
$
(20,764
)
 
$
22,364

 
$
(497
)
 
$
29

 
$
5,497

Adoption of revenue standard
—

 
—

 
—

 
—

 
441

 
—

 
—

 
441

Adoption of intra-entity asset transfers standard
—

 
—

 
—

 
—

 
(183
)
 
—

 
—

 
(183
)
Net income
—

 
—

 
—

 
—

 
1,492

 
—

 
—

 
1,492

Activity related to non-controlling interests
—

 
—

 
—

 
—

 
—

 
—

 
(1
)
 
(1
)
Other comprehensive income (loss), net of tax
—

 
—

 
—

 
—

 
—

 
124

 
—

 
124

Cash dividends declared on Class A and Class B common stock, $0.25 per share
—

 
—

 
—

 
—

 
(262
)
 
—

 
—

 
(262
)
Purchases of treasury stock
—

 
—

 
—

 
(1,383
)
 
—

 
—

 
—

 
(1,383
)
Share-based payments
—

 
—

 
2

 
4

 
—

 
—

 
—

 
6

Balance at March 31, 2018
$
—

 
$
—

 
$
4,367

 
$
(22,143
)
 
$
23,852

 
$
(373
)
 
$
28

 
$
5,731


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


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MASTERCARD INCORPORATED
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
 
Three Months Ended March 31,
 
2018
 
2017
 
(in millions)
Operating Activities
 
 
 
Net income
$
1,492

 
$
1,081

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Amortization of customer and merchant incentives
287

 
266

Depreciation and amortization
120

 
92

Share-based compensation
43

 
39

Deferred income taxes
(46
)
 
8

Other
1

 
9

Changes in operating assets and liabilities:
 
 
 
Accounts receivable
(80
)
 
(120
)
Settlement due from customers
(156
)
 
8

Prepaid expenses
(375
)
 
(660
)
Accrued litigation and legal settlements
111

 
13

Restricted security deposits held for customers
(141
)
 
(19
)
Accounts payable
(62
)
 
57

Settlement due to customers
(63
)
 
(124
)
Accrued expenses
(140
)
 
10

Net change in other assets and liabilities
44

 
67

Net cash provided by operating activities
1,035

 
727

Investing Activities
 
 
 
Purchases of investment securities available-for-sale
(108
)
 
(205
)
Purchases of investments held-to-maturity
(123
)
 
(377
)
Proceeds from sales of investment securities available-for-sale
198

 
89

Proceeds from maturities of investment securities available-for-sale
108

 
151

Proceeds from maturities of investments held-to-maturity
430

 
320

Purchases of property, plant and equipment
(82
)
 
(64
)
Capitalized software
(44
)
 
(30
)
Other investing activities
(12
)
 
(7
)
Net cash provided by (used in) investing activities
367

 
(123
)
Financing Activities
 
 
 
Purchases of treasury stock
(1,352
)
 
(962
)
Dividends paid
(263
)
 
(238
)
Proceeds from debt
991

 
—

Tax withholdings related to share-based payments
(77
)
 
(46
)
Cash proceeds from exercise of stock options
40

 
19

Other financing activities
(4
)
 
(10
)
Net cash used in financing activities
(665
)
 
(1,237
)
Effect of exchange rate changes on cash, cash equivalents, restricted cash and restricted cash equivalents
95

 
35

Net increase (decrease) cash, cash equivalents, restricted cash and restricted cash equivalents
832

 
(598
)
Cash, cash equivalents, restricted cash and restricted cash equivalents - beginning of period
7,592

 
8,273

Cash, cash equivalents, restricted cash and restricted cash equivalents - end of period
$
8,424

 
$
7,675

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


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MASTERCARD INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Note 1. Summary of Significant Accounting Policies
Organization
Mastercard Incorporated and its consolidated subsidiaries, including Mastercard International Incorporated (“Mastercard International” and together with Mastercard Incorporated, “Mastercard” or the “Company”), is a technology company in the global payments industry that connects consumers, financial institutions, merchants, governments, digital partners, businesses and other organizations worldwide, enabling them to use electronic forms of payment instead of cash and checks.
Consolidation and Basis of Presentation
The consolidated financial statements include the accounts of Mastercard and its majority-owned and controlled entities, including any variable interest entities (“VIEs”) for which the Company is the primary beneficiary. At March 31, 2018 and December 31, 2017, there were no significant VIEs which required consolidation. The Company consolidates acquisitions as of the date in which the Company has obtained a controlling financial interest. Intercompany transactions and balances have been eliminated in consolidation. Certain prior period amounts have been reclassified to conform to the 2018 presentation. The Company follows accounting principles generally accepted in the United States of America (“GAAP”).
The balance sheet as of December 31, 2017 was derived from the audited consolidated financial statements as of December 31, 2017. The consolidated financial statements for the three months ended March 31, 2018 and 2017 and as of March 31, 2018 are unaudited, and in the opinion of management, include all normal recurring adjustments that are necessary to present fairly the results for interim periods. The results of operations for the three months ended March 31, 2018 are not necessarily indicative of the results to be expected for the full year.
The accompanying unaudited consolidated financial statements are presented in accordance with the U.S. Securities and Exchange Commission requirements for Quarterly Reports on Form 10-Q. Reference should be made to the Mastercard Incorporated Annual Report on Form 10-K for the year ended December 31, 2017 for additional disclosures, including a summary of the Company’s significant accounting policies.
Non-controlling interest amounts are included in the consolidated statement of operations within other income (expense). For the three months ended March 31, 2018 and 2017, activity from non-controlling interests was not material to the respective period results.
Recent Accounting Pronouncements
Income taxes - In March 2018, the Financial Accounting Standards Board (the “FASB”) issued guidance allowing for the recognition of provisional amounts related to the 2017 U.S. tax reform (the “U.S. Tax Reform”) in the event that the accounting was not complete by the end of the period enacted. The provisional amounts can be updated within a one year measurement period with changes recorded as a component of income tax expense during the reporting period. This guidance was effective upon issuance. Refer to Note 13 (Income Taxes) for further discussion.
Comprehensive income - In February 2018, the FASB issued accounting guidance that allows for a one-time reclassification from accumulated other comprehensive income (loss) to retained earnings for stranded tax effects resulting from the U.S. Tax Reform. The guidance is effective for periods beginning after December 15, 2018, with early adoption permitted. The Company is in the process of evaluating the impacts this guidance will have on its consolidated financial statements and, at this time, does not expect the impacts to be material.
Derivatives and hedging - In August 2017, the FASB issued accounting guidance to improve and simplify existing guidance to allow companies to better reflect their risk management activities in the financial statements. The guidance expands the ability to account for nonfinancial and financial risk components under hedge accounting and eliminates the requirement to separately measure and recognize hedge ineffectiveness and eases requirements of an entity’s assessment of hedge effectiveness. This guidance is effective for periods beginning after December 15, 2018 and early adoption is permitted. The Company currently does not account for its foreign currency derivative contracts under hedge accounting and does not expect the standard to have an impact to the Company. For a more detailed discussion of the Company’s foreign exchange risk management activities, refer to Note 16 (Foreign Exchange Risk Management).


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MASTERCARD INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (Continued)


Net periodic pension cost and net periodic postretirement benefit cost - In March 2017, the FASB issued accounting guidance to improve the presentation of net periodic pension cost and net periodic postretirement benefit cost. Under this guidance, the service cost component is required to be reported in the same line item as other compensation costs arising from services rendered by employees during the period. The other components of the net periodic benefit costs are required to be presented in the consolidated statement of operations separately from the service cost component and outside of operating income. This guidance is required to be applied retrospectively and is effective for periods beginning after December 15, 2017. The Company adopted this guidance effective January 1, 2018. The adoption of this new accounting guidance resulted in no material impact on the Company’s current year consolidated financial statements. The Company did not apply this guidance retrospectively, as the impact was de minimis as to the prior year consolidated financial statements.
Restricted cash - In November 2016, the FASB issued accounting guidance to address diversity in the classification and presentation of changes in restricted cash on the consolidated statement of cash flows. Under this guidance, companies are required to present restricted cash and restricted cash equivalents with cash and cash equivalents when reconciling the beginning-of-period and end-of-period amounts shown on the consolidated statement of cash flows. This guidance is required to be applied retrospectively and is effective for periods beginning after December 15, 2017. The Company adopted this guidance effective January 1, 2018. In accordance with the adoption of this standard, the Company includes restricted cash, which currently consists primarily of restricted cash for litigation settlement and restricted security deposits held for customers in its reconciliation of beginning-of-period and end-of-period amounts shown on the consolidated statement of cash flows.
Intra-entity asset transfers - In October 2016, the FASB issued accounting guidance to simplify the accounting for income tax consequences of intra-entity transfers of assets other than inventory. Under this guidance, companies will be required to recognize the income tax consequences of an intra-entity asset transfer when the transfer occurs. This guidance must be applied on a modified retrospective basis through a cumulative-effect adjustment to retained earnings as of the period of adoption. The guidance is effective for periods beginning after December 15, 2017. The Company adopted this guidance effective January 1, 2018. For a more detailed discussion, refer to Note 13 (Income Taxes). See the section in this note entitled Cumulative Effect of the Adopted Accounting Pronouncements for a summary of the cumulative impact of adopting this standard as of January 1, 2018.
Leases - In February 2016, the FASB issued accounting guidance that will change how companies account for and present lease arrangements. This guidance requires companies to recognize leased assets and liabilities for both financing and operating leases. This guidance is effective for periods after December 15, 2018 and early adoption is permitted. Companies are required to adopt the guidance using a modified retrospective method. The Company expects to adopt this guidance effective January 1, 2019. The Company is in the process of evaluating the potential effects this guidance will have on its consolidated financial statements.
Revenue recognition - In May 2014, the FASB issued accounting guidance that provides a single, comprehensive revenue recognition model for all contracts with customers and supersedes most of the existing revenue recognition requirements. Under this guidance, an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The Company adopted this guidance effective January 1, 2018 under the modified retrospective transition method, applying the standard to contracts not completed as of January 1, 2018 and considered the aggregate amount of modifications. See the section in this note entitled Cumulative Effect of the Adopted Accounting Pronouncements for a summary of the cumulative impact of adopting this standard as of January 1, 2018.
This new revenue guidance will primarily impact the timing of when certain customer incentives are recognized in the Company’s consolidated statement of operations, which will now be recognized over the life of the contract versus as earned by the customer. In addition, the new revenue guidance impacts the accounting recognition for certain market development fund contributions and expenditures. Historically, these items were recorded on a net basis in net revenue and will now be recognized on a gross basis, resulting in an increase to both revenues and expenses. The estimated full-year impact for both of these items on the Company’s consolidated financial statements is expected to be an increase of approximately $300 million in net revenue and $200 million in operating expenses in 2018. This estimate could change and is dependent upon how new customer deals will be structured throughout 2018 and when certain marketing costs are incurred.


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MASTERCARD INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (Continued)


The following tables summarize the impact of the revenue standard on the Company’s consolidated statement of operations for the three months ended March 31, 2018 and consolidated balance sheet as of March 31, 2018:
 
Three Months Ended March 31, 2018
 
Balances excluding revenue standard
 
Impact of revenue standard
 
As reported
 
(in millions)
Net Revenue
$
3,473

 
$
107

 
$
3,580

 
 
 
 
 
 
Operating Expenses
 
 
 
 
 
General and administrative
1,299

 
(5
)
 
1,294

Advertising and marketing
184

 
40

 
224

 
 
 
 
 
 
Income before income taxes
1,731

 
72

 
1,803

Income tax expense
297

 
14

 
311

Net Income
1,434

 
58

 
1,492

 
March 31, 2018
 
Balances excluding revenue standard
 
Impact of revenue standard
 
As reported
 
(in millions)
Assets
 
 
 
 
 
Accounts receivable
$
2,075

 
$
47

 
$
2,122

Prepaid expenses and other current assets
1,081

 
192

 
1,273

Deferred income taxes
439

 
(89
)
 
350

Other assets
2,088

 
738

 
2,826

 
 
 
 
 
 
Liabilities
 
 
 
 
 
Accounts payable
808

 
(438
)
 
370

Accrued expenses
4,045

 
456

 
4,501

Other current liabilities
1,082

 
(78
)
 
1,004

Other liabilities
1,203

 
458

 
1,661

 
 
 
 
 
 
Equity
 
 
 
 
 
Retained earnings
23,362

 
490

 
23,852

For a more detailed discussion on revenue recognition, refer to Note 3 (Revenue).


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MASTERCARD INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (Continued)


Cumulative Effect of the Adopted Accounting Pronouncements
The following table summarizes the cumulative impact of the changes made to the January 1, 2018 consolidated balance sheet for the adoption of the new accounting standards pertaining to revenue recognition and intra-entity asset transfers. The prior periods have not been restated and have been reported under the accounting standards in effect for those periods.
 
Balance at December 31, 2017
 
Impact of revenue standard
 
Impact of intra-entity asset transfers standard
 
Balance at
January 1, 2018
 
(in millions)
Assets
 
 
 
 
 
 
 
Accounts receivable
$
1,969

 
$
44

 
$
—

 
$
2,013

Prepaid expenses and other current assets
1,040

 
172

 
(17
)
 
1,195

Deferred income taxes
250

 
(82
)
 
186

 
354

Other assets
2,298

 
660

 
(352
)
 
2,606

Liabilities
 
 
 
 
 
 
 
Accounts payable
933

 
(495
)
 
—

 
438

Accrued expenses
3,931

 
481

 
—

 
4,412

Other current liabilities
792

 
(44
)
 
—

 
748

Other liabilities
1,438

 
411

 
—

 
1,849

Equity
 
 
 
 
 
 
 
Retained earnings
22,364

 
441

 
(183
)
 
22,622

Note 2. Acquisitions
In 2017, the Company acquired businesses for total consideration of $1.5 billion. The Company continues to evaluate and finalize the purchase price accounting. For the preliminary estimated fair values of the purchase price allocations, as of the acquisition dates, refer to Note 2 (Acquisitions) to the consolidated financial statements included in Part II, Item 8 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2017.
Note 3. Revenue
Mastercard’s business model involves four participants in addition to the Company: account holders, merchants, issuers (the account holders’ financial institutions) and acquirers (the merchants’ financial institutions). Revenue from contracts with customers is recognized when services are performed in an amount that reflects the consideration to which the Company expects to be entitled to in exchange for those services. Revenue recognized from domestic assessments, cross-border volume fees and transaction processing are derived from Mastercard’s payment network services. Revenue is generated by charging fees to issuers, acquirers and other stakeholders for providing switching services, as well as by assessing customers based primarily on the dollar volume of activity, or gross dollar volume, on the cards and other devices that carry the Company’s brands. Revenue is generally derived from transactional information accumulated by Mastercard’s systems or reported by customers. In addition, the Company recognizes revenue from other payment-related products and services in the period in which the related transactions occur or services are performed.
The price structure for Mastercard’s products and services is dependent on the nature of volumes, types of transactions and type of products and services offered to customers. Net revenue can be impacted by the following:
•
domestic or cross-border transactions
•
geographic region or country in which the transaction occurs
•
volumes/transactions subject to tiered rates
•
processed or not processed by the Company


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MASTERCARD INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (Continued)


•
amount of usage of the Company’s other products or services
•
amount of rebates and incentives provided to customers
The Company classifies its net revenue into the following five categories:
Domestic assessments are fees charged to issuers and acquirers based primarily on the dollar volume of activity on cards and other devices that carry the Company’s brands where the acquirer country and the issuer country are the same. Revenue from domestic assessments are recorded as revenue in the period it is earned, which is when the related volume is generated on the cards or other devices that carry the Company’s brand.
Cross-border volume fees are charged to issuers and acquirers based on the dollar volume of activity on cards and other devices that carry the Company’s brands where the acquirer country and the issuer country are different. Revenue from cross-border volume are recorded as revenue in the period it is earned, which is when the related volume is generated on the cards or other devices that carry the Company’s brand.
Transaction processing revenue is earned for both domestic and cross-border transactions and is primarily based on the number of transactions. Transaction processing includes the following:
•
Switched transaction revenue is generated from the following products and services:
◦
Authorization is the process by which a transaction is routed to the issuer for approval. In certain circumstances, such as when the issuer’s systems are unavailable or cannot be contacted, Mastercard or others approve such transactions on behalf of the issuer in accordance with either the issuer’s instructions or applicable rules (also known as “stand-in”).
◦
Clearing is the determination and exchange of financial transaction information between issuers and acquirers after a transaction has been successfully conducted at the point of interaction. Transactions are cleared among customers through Mastercard’s central and regional processing systems.
◦
Settlement is facilitating the exchange of funds between parties.
•
Connectivity fees are charged to issuers, acquirers and other financial institutions for network access, equipment and the transmission of authorization and settlement messages. These fees are based on the size of the data being transmitted and the number of connections to the Company’s network.
•
Other processing fees include issuer and acquirer processing solutions; payment gateways for e-commerce merchants; mobile gateways for mobile initiated transactions; and safety and security.
Transaction-based revenue is recognized in the period in which the related transactions occur.
Other revenues consist of value added service offerings that are typically sold with the Company’s payment service offerings.
•
Consulting, data analytic and research fees.
•
Safety and security services fees are for products and services offered to prevent, detect and respond to fraud and to ensure the safety of transactions made on Mastercard products.
•
Loyalty and rewards solutions fees are charged to issuers for benefits provided directly to consumers with Mastercard-branded cards, such as access to a global airline lounge network, global and local concierge services, individual insurance coverages, emergency card replacement, emergency cash advance services and a 24-hour cardholder service center. Loyalty and reward solution fees also include rewards campaigns and management services.
•
Program management services provided to prepaid card issuers consist of foreign exchange margin, commissions, load fees and ATM withdrawal fees paid by cardholders on the sale and encashment of prepaid cards.
•
Bank account-based payment services relating to automated clearing house (“ACH”) transactions and other ACH related services.


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MASTERCARD INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (Continued)


•
Other payment-related products and services, including account and transaction enhancement services, rules compliance and publications.
Revenue associated with these other payment-related products and services are recognized in the period in which the related transactions occur or services are performed.
Rebates and incentives (contra-revenue) are provided to customers that meet certain volume targets and can be in the form of a rebate or other support incentives, which are tied to performance.  Rebates and incentives are recorded as a reduction of revenue when revenue is recognized, ratably over the contractual term.  In addition, Mastercard may make incentive payments to a customer directly related to entering into an agreement, which are generally capitalized and amortized over the life of the agreement on a straight-line basis.
The following table disaggregates the Company’s consolidated net revenue by revenue source and geography for the three months ended March 31, 2018:
 
(in millions)
Revenue by source:
 
Domestic assessments
$
1,458

Cross-border volume fees
1,157

Transaction processing
1,707

Other revenues
748

Gross revenue
5,070

Rebates and incentives (contra-revenue)
(1,490
)
Net revenue
$
3,580

 
 
Revenue by geography:
 
North American Markets
$
1,248

International Markets
2,287

Other 1
45

Net revenue
$
3,580

1 Includes revenues managed by corporate functions.
Receivables from contracts with customers of $1,980 million and $1,873 million as of March 31, 2018 and December 31, 2017, respectively, are recorded within accounts receivable in the consolidated balance sheet. Services are billed quarterly or more frequently dependent upon the nature of the performance obligation and the underlying contractual terms with the customer. The Company does not offer extended payment terms to customers.
Contract assets include unbilled consideration typically resulting from executed consulting, data analytic and research services performed for customers in connection with Mastercard’s payment network service arrangements. Collection of these services typically occurs over the contractual term. These contract assets are included in other current assets and other assets on the consolidated balance sheet at March 31, 2018 in the amounts of $27 million and $61 million, respectively. The Company did not have contract assets at December 31, 2017.
The Company defers the recognition of revenue when consideration has been received prior to the satisfaction of performance obligations. As these performance obligations are satisfied, revenue is subsequently recognized. Deferred revenue is primarily derived from consulting, data analytic and research services. Deferred revenue is included in other current liabilities and other liabilities on the consolidated balance sheet at March 31, 2018 in the amounts of $230 million and $65 million, respectively. Revenue recognized from performance obligations satisfied during the three months ended March 31, 2018 was $161 million. The comparable amounts included in other current liabilities and other liabilities at December 31, 2017 were $230 million and $17 million, respectively.
The Company’s remaining performance period for its contracts with customers for its payment network services are generally


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MASTERCARD INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (Continued)


long-term in nature (up to 10 years). As a payment network service provider, the Company provides its customers with continuous access to its payment network and stands ready to provide transaction processing and related services over the contractual term. Consideration is variable based upon the number of transactions processed and volume activity on the cards and other devices that carry the Company’s brands. The Company has elected the optional exemption to not disclose the remaining performance obligations related to its payment network services.
The following table summarizes expected revenues for the remaining performance obligations with customers from the Company’s other products and services including real-time account-based payment services, consulting and research fees and loyalty programs.  The Company expects to recognize revenue in the future related to these unsatisfied performance obligations for fixed-fee contracts open as of March 31, 2018 that are greater than one year.
 
(in millions)
Remainder of 2018
$
211

2019-2020
473

2021-2022
79

2023 and thereafter
23

Total
$
786

Note 4. Earnings Per Share
The components of basic and diluted earnings per share (“EPS”) for common stock were as follows:
 
Three Months Ended March 31,
 
2018
 
2017
 
(in millions, except per share data)
Numerator
 
 
 
Net income
$
1,492

 
$
1,081

Denominator
 
 
 
Basic weighted-average shares outstanding
1,051

 
1,078

Dilutive stock options and stock units
6

 
4

Diluted weighted-average shares outstanding 1
1,057

 
1,082

Earnings per Share
 
 
 
Basic
$
1.42

 
$
1.00

Diluted
$
1.41

 
$
1.00


1 For the periods presented, the calculation of diluted EPS excluded a minimal amount of anti-dilutive share-based payment awards.
Note 5. Cash, Cash Equivalents, Restricted Cash and Restricted Cash Equivalents
The Company’s cash and cash equivalents include certain investments with daily liquidity and with a maturity of three months or less from the date of purchase. Cash equivalents are recorded at cost, which approximate fair value.
Restricted cash and restricted cash equivalents - The Company classifies cash and cash equivalents as restricted when the cash is unavailable for withdrawal or usage for general operations. The Company has the following types of restricted cash balances:
•
Restricted cash for litigation settlement - The Company has restricted cash for litigation within a qualified settlement fund related to a preliminary settlement agreement for the U.S. merchant class litigation. The funds continue to be restricted for payments until the litigation matter is resolved. Refer to Note 14 (Legal and Regulatory Proceedings).


15
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MASTERCARD INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (Continued)


•
Restricted security deposits held for customers - The Company requires collateral from certain customers for settlement of their transactions. The majority of collateral for settlement is in the form of standby letters of credit and bank guarantees which are not recorded on the consolidated balance sheet. Additionally, the Company holds cash deposits and certificates of deposit from certain customers of Mastercard as collateral for settlement of their transactions, which are recorded as assets on the consolidated balance sheet. These assets are fully offset by corresponding liabilities included on the consolidated balance sheet. These security deposits are typically held for the duration of the agreement with the customers.
•
Other restricted cash balances - The Company has other restricted cash balances which include contractually restricted deposits, as well as cash balances that are restricted based on the Company’s intention with regards to usage.
The following table provides a reconciliation of cash, cash equivalents, restricted cash and restricted cash equivalents reported within the statement of financial position that total to the beginning of period and end of period amounts shown in the statement of cash flows.
 
December 31,
 
2017
 
2016
 
(in millions)
Cash and cash equivalents
$
5,933

 
$
6,721

Restricted cash and restricted cash equivalents
 
 
 
Restricted cash for litigation settlement
546

 
543

Restricted security deposits held for customers
1,085

 
991

Prepaid expenses and other current assets
28

 
3

Other assets
—

 
15

Cash, cash equivalents, restricted cash and restricted cash equivalents - beginning of period 1
$
7,592

 
$
8,273

 
 
 
 
 
March 31,
 
2018
 
2017
 
(in millions)
Cash and cash equivalents
$
6,890

 
$
6,006

Restricted cash and restricted cash equivalents
 
 
 
Restricted cash for litigation settlement
548

 
543

Restricted security deposits held for customers
965

 
984

Prepaid expenses and other current assets
21

 
126

Other assets
—

 
16

Cash, cash equivalents, restricted cash and restricted cash equivalents - end of period 1
$
8,424

 
$
7,675


1 As shown on the consolidated statement of cash flows.
Note 6. Fair Value and Investment Securities
Financial Instruments – Recurring Measurements
The Company classifies its fair value measurements of financial instruments into a three-level hierarchy (the “Valuation Hierarchy”). There were no transfers made among the three levels in the Valuation Hierarchy during the three months ended March 31, 2018.


16
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MASTERCARD INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (Continued)


The distribution of the Company’s financial instruments measured at fair value on a recurring basis within the Valuation Hierarchy were as follows:
 
March 31, 2018
 
December 31, 2017
 
Quoted Prices
in Active
Markets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
Total
 
Quoted Prices
in Active
Markets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
Total
 
(in millions)
Assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Investment securities available for sale 1:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Municipal securities
$
—

 
$
14

 
$
—

 
$
14

 
$
—

 
$
17

 
$
—

 
$
17

Government and agency securities
89

 
54

 
—

 
143

 
81

 
104

 
—

 
185

Corporate securities
—

 
757

 
—

 
757

 
—

 
876

 
—

 
876

Asset-backed securities
—

 
55

 
—

 
55

 
—

 
70

 
—

 
70

Equity securities
1

 
—

 
—

 
1

 
1

 
—

 
—

 
1

Derivative instruments 2:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Foreign currency derivative assets
—

 
9

 
—

 
9

 
—

 
6

 
—

 
6

Deferred compensation plan 3:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Deferred compensation assets
61

 
—

 
—

 
61

 
55

 
—

 
—

 
55

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Derivative instruments 2:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Foreign currency derivative liabilities
$
—

 
$
(37
)
 
$
—

 
$
(37
)
 
$
—

 
$
(30
)
 
$
—

 
$
(30
)
Deferred compensation plan 4:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Deferred compensation liabilities
(58
)
 
—

 
—

 
(58
)
 
(54
)
 
—

 
—

 
(54
)
1 The Company’s U.S. government securities and marketable equity securities are classified within Level 1 of the Valuation Hierarchy as the fair values are based on unadjusted quoted prices for identical assets in active markets. The fair value of the Company’s available-for-sale municipal securities, government and agency securities, corporate securities and asset-backed securities are based on observable inputs such as quoted prices, benchmark yields and issuer spreads for similar assets in active markets and are therefore included in Level 2 of the Valuation Hierarchy.
2 The Company’s foreign currency derivative asset and liability contracts have been classified within Level 2 of the Valuation Hierarchy as the fair value is based on observable inputs such as broker quotes relating to foreign currency exchange rates for similar derivative instruments. See Note 16 (Foreign Exchange Risk Management) for further details.
3 The Company has a nonqualified deferred compensation plan where assets are invested primarily in mutual funds held in a rabbi trust, which is restricted for payments to participants of the plan. The Company has elected to use the fair value option for these mutual funds, which are measured using quoted prices of identical instruments in active markets and are included in prepaid expenses and other current assets on the consolidated balance sheet.
4 The deferred compensation liabilities are measured at fair value based on the quoted prices of instruments identical to the investment vehicles selected by the participants. They are included in other liabilities on the consolidated balance sheet.
Settlement and Other Guarantee Liabilities
The Company estimates the fair value of its settlement and other guarantees using market assumptions for relevant though not directly comparable undertakings, as the latter are not observable in the market given the proprietary nature of such guarantees. At March 31, 2018 and December 31, 2017, the carrying value and fair value of settlement and other guarantee liabilities were not material and accordingly are not included in the Valuation Hierarchy table above. Settlement and other guarantee liabilities are classified within Level 3 of the Valuation Hierarchy as their valuation requires substantial judgment and estimation of factors that are not observable in the market. For additional information regarding the Company’s settlement and other guarantee liabilities, see Note 15 (Settlement and Other Risk Management).


17
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MASTERCARD INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (Continued)


Financial Instruments - Non-Recurring Measurements
Held-to-Maturity Securities
Investments on the consolidated balance sheet include both available-for-sale and short-term held-to-maturity securities. Held-to-maturity securities are not measured at fair value on a recurring basis and are not included in the Valuation Hierarchy table above. At March 31, 2018 and December 31, 2017, the Company held $408 million and $700 million, respectively, of short-term held-to-maturity securities. The cost of these securities approximates fair value.
Nonmarketable Equity Investments
The Company’s nonmarketable equity investments are measured at fair value at initial recognition and for impairment testing. In addition, nonmarketable equity investments accounted for under the cost method of accounting are adjusted for changes resulting from observable price changes in orderly transactions for the identical or similar investments of the same issuer. Nonmarketable equity investments are classified within Level 3 of the Valuation Hierarchy due to the absence of quoted market prices, the inherent lack of liquidity, and the fact that inputs used to measure fair value are unobservable and require management’s judgment. The Company uses discounted cash flows and market assumptions to estimate the fair value of its nonmarketable equity investments when certain events or circumstances indicate that impairment may exist. These investments are included in other assets on the consolidated balance sheet and in Note 7 (Prepaid Expenses and Other Assets).
Debt
The Company estimates the fair value of its long-term debt based on market quotes. These debt instruments are not traded in active markets and are classified within Level 2 of the Valuation Hierarchy. At March 31, 2018, the carrying value and fair value of long-term debt was $6.5 billion and $6.7 billion, respectively. At December 31, 2017, the carrying value and fair value of long-term debt was $5.4 billion and $5.7 billion, respectively.
Other Financial Instruments
Certain financial instruments are carried on the consolidated balance sheet at cost, which approximates fair value due to their short-term, highly liquid nature. These instruments include cash and cash equivalents, restricted cash, accounts receivable, settlement due from customers, restricted security deposits held for customers, accounts payable, settlement due to customers and other accrued liabilities.
Non-Financial Instruments
Certain assets are measured at fair value on a nonrecurring basis for purposes of initial recognition and impairment testing. The Company’s non-financial assets measured at fair value on a nonrecurring basis include property, plant and equipment, goodwill and other intangible assets. These assets are subject to fair value adjustments in certain circumstances, such as when there is evidence of impairment.
The contingent consideration attributable to acquisitions made in 2017 is primarily based on the achievement of 2018 revenue targets. This contingent consideration liability is classified within Level 3 of the Valuation Hierarchy due to the absence of quoted market prices. The activity of the Company’s contingent consideration liability for the three months ended March 31, 2018 was as follows:
 
(in millions)
Balance at December 31, 2017
$
219

Net change in valuation
4

Payments
(5
)
Foreign currency translation
9

Balance at March 31, 2018
$
227



18
Table of Contents
MASTERCARD INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (Continued)


Amortized Costs and Fair Values – Available-for-Sale Investment Securities
The major classes of the Company’s available-for-sale investment securities, for which unrealized gains and losses are recorded as a separate component of other comprehensive income (loss) on the consolidated statement of comprehensive income, and their respective amortized cost basis and fair values as of March 31, 2018 and December 31, 2017 were as follows:
 
 
March 31, 2018
 
December 31, 2017
 
Amortized
Cost
 
Gross
Unrealized
Gain
 
Gross
Unrealized
Loss
 
Fair
Value
 
Amortized
Cost
 
Gross
Unrealized
Gain
 
Gross
Unrealized
Loss
 
Fair
Value
 
(in millions)
Municipal securities
$
14

 
$
—

 
$
—

 
$
14

 
$
17

 
$
—

 
$
—

 
$
17

Government and agency securities
143

 
—

 
—

 
143

 
185

 
—

 
—

 
185

Corporate securities
757

 
1

 
(1
)
 
757

 
875

 
2

 
(1
)
 
876

Asset-backed securities
55

 
—

 
—

 
55

 
70

 
—

 
—

 
70

Equity securities
—

 
1

 
—

 
1

 
—

 
1

 
—

 
1

Total
$
969

 
$
2

 
$
(1
)
 
$
970

 
$
1,147

 
$
3

 
$
(1
)
 
$
1,149

The Company’s available-for-sale investment securities held at March 31, 2018 and December 31, 2017 primarily carried a credit rating of A- or better. The municipal securities are primarily comprised of tax-exempt bonds and are diversified across states and sectors. Government and agency securities include U.S. government bonds, U.S. government sponsored agency bonds and foreign government bonds with similar credit quality to that of the U.S. government bonds. Corporate securities are comprised of commercial paper and corporate bonds. The asset-backed securities are investments in bonds which are collateralized primarily by automobile loan receivables.
Investment Maturities
The maturity distribution based on the contractual terms of the Company’s investment securities at March 31, 2018 was as follows:
 
Available-For-Sale
 
Amortized
Cost
 
Fair Value
 
(in millions)
Due within 1 year
$
256

 
$
256

Due after 1 year through 5 years
713

 
713

Due after 5 years through 10 years
—

 
—

Due after 10 years
—

 
—

No contractual maturity 1
—

 
1

Total
$
969

 
$
970

1 Equity securities have been included in the No contractual maturity category, as these securities do not have stated maturity dates.
Investment Income
Investment income primarily consists of interest income generated from cash, cash equivalents and investments. Gross realized gains and losses are recorded within investment income on the Company’s consolidated statement of operations. The gross realized gains and losses from the sales of available-for-sale securities for the three months ended March 31, 2018 and 2017 were not significant.


19
Table of Contents
MASTERCARD INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (Continued)


Note 7. Prepaid Expenses and Other Assets
Prepaid expenses and other current assets consisted of the following:
 
March 31,
2018
 
December 31,
2017
 
(in millions)
Customer and merchant incentives
$
701

 
$
464

Prepaid income taxes
21

 
77

Other
551

 
499

Total prepaid expenses and other current assets
$
1,273

 
$
1,040

Other assets consisted of the following:
 
March 31,
2018
 
December 31,
2017
 
(in millions)
Customer and merchant incentives
$
2,230

 
$
1,434

Nonmarketable equity investments
253

 
249

Prepaid income taxes
—

 
352

Income taxes receivable
156

 
178

Other
187

 
85

Total other assets
$
2,826

 
$
2,298

Customer and merchant incentives represent payments made or amounts to be paid to customers and merchants under business agreements. Costs directly related to entering into such an agreement are generally deferred and amortized over the life of the agreement. Amounts to be paid for these incentives and the related liability were included in accrued expenses and other liabilities. The increase in customer and merchant incentives and the decrease in prepaid income taxes at March 31, 2018 from December 31, 2017 are primarily due to the impact from the adoption of the new accounting standards pertaining to revenue recognition and intra-entity asset transfers, respectively. See Note 1 (Summary of Significant Accounting Policies) for additional information on the cumulative impact of the adoption of these accounting pronouncements.
Nonmarketable equity investments represent the Company’s cost and equity method investments.
Note 8. Accrued Expenses and Accrued Litigation
Accrued expenses consisted of the following:
 
March 31,
2018
 
December 31,
2017
 
(in millions)
Customer and merchant incentives
$
3,310

 
$
2,648

Personnel costs
312

 
613

Advertising
74

 
88

Income and other taxes
374

 
194

Other
431

 
388

Total accrued expenses
$
4,501

 
$
3,931

As of March 31, 2018 and December 31, 2017, the Company’s provision for litigation was $828 million and $709 million, respectively. These amounts are not included in the accrued expenses table above and are separately reported as accrued litigation on the consolidated balance sheet. See Note 14 (Legal and Regulatory Proceedings) for further discussion of the U.S. and Canadian merchant class litigations.


20
Table of Contents
MASTERCARD INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (Continued)


Note 9. Debt
Total debt outstanding consisted of the following at March 31, 2018 and December 31, 2017:
Notes
 
Issuance
Date
 
Interest Payment Terms
 
Maturity
Date
 
Aggregate Principal Amount
 
Stated
Interest Rate
 
Effective
Interest Rate
 
March 31,
2018
 
December 31,
2017
 
 
 
 
 
 
 
 
(in millions, except percentages)
2018 USD Notes
 
February 2018
 
Semi-annually
 
2028
 
$
500

 
3.500
%
 
3.598
%
 
$
500

 
$
—

 
 
 
 
 
 
2048
 
500

 
3.950
%
 
3.990
%
 
500

 
—

 
 
 
 
 
 
 
 
$
1,000

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2016 USD Notes
 
November 2016
 
Semi-annually
 
2021
 
$
650

 
2.000
%
 
2.236
%
 
650

 
650

 
 
 
 
 
 
2026
 
750

 
2.950
%
 
3.044
%
 
750

 
750

 
 
 
 
 
 
2046
 
600

 
3.800
%
 
3.893
%
 
600

 
600

 
 
 
 
 
 
 
 
$
2,000

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2015 Euro Notes
 
December 2015
 
Annually
 
2022
 
€
700

 
1.100
%
 
1.265
%
 
862

 
839

 
 
 
 
 
 
2027
 
800

 
2.100
%
 
2.189
%
 
985

 
958

 
 
 
 
 
 
2030
 
150

 
2.500
%
 
2.562
%
 
185

 
180

 
 
 
 
 
 
 
 
€
1,650

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2014 USD Notes
 
March 2014
 
Semi-annually
 
2019
 
$
500

 
2.000
%
 
2.178
%
 
500

 
500

 
 
 
 
 
 
2024
 
1,000

 
3.375
%
 
3.484
%
 
1,000

 
1,000

 
 
 
 
 
 
 
 
$
1,500

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
6,532

 
5,477

Less: Unamortized discount and debt issuance costs
 
(63
)
 
(53
)
Long-term debt
 
$
6,469

 
$
5,424

In February 2018, the Company issued $500 million principal amount of notes due February 2028 and $500 million principal amount of notes due February 2048 (collectively the “2018 USD Notes”). The net proceeds from the issuance of the 2018 USD Notes, after deducting the original issue discount, underwriting discount and offering expenses, were $991 million.
The net proceeds, after deducting the original issue discount, underwriting discount and offering expenses, from the issuance of the 2016 USD Notes, the 2015 Euro Notes and the 2014 USD Notes, were $1.969 billion, $1.723 billion and $1.484 billion, respectively.
None of the outstanding debt, described above, is subject to financial covenants and may be redeemed in whole, or in part, at the Company’s option at any time for a specified make-whole amount. These notes are senior unsecured obligations and would rank equally with any future unsecured and unsubordinated indebtedness. The proceeds of the notes are to be used for general corporate purposes.
In November 2015, the Company established a commercial paper program (the “Commercial Paper Program”) under which it is authorized to issue up to $3.75 billion in outstanding notes, with maturities up to 397 days from the date of issuance. The Commercial Paper Program is available in U.S. dollars.
In conjunction with the Commercial Paper Program, the Company entered into a committed unsecured $3.75 billion revolving credit facility (the “Credit Facility”). Borrowings under the Credit Facility are available in U.S. dollars and/or euros. In October 2017, the Company extended the Credit Facility for an additional year to October 2022. The extension did not result in any material changes to the terms and conditions of the Credit Facility. The facility fee and borrowing cost under the Credit Facility are based upon the Company’s credit rating. At March 31, 2018, the applicable facility fee was 8 basis points on the average daily


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commitment (whether or not utilized). In addition to the facility fee, interest on borrowings under the Credit Facility would be charged at the London Interbank Offered Rate (“LIBOR”) plus an applicable margin of 79.5 basis points, or an alternative base rate. The Credit Facility contains customary representations, warranties, events of default and affirmative and negative covenants, including a financial covenant limiting the maximum level of consolidated debt to earnings before interest, taxes, depreciation and amortization (“EBITDA”). The Company was in compliance in all material respects with the covenants of the Credit Facility at March 31, 2018. The majority of Credit Facility lenders are customers or affiliates of customers of the Company.
Borrowings under the Commercial Paper Program and the Credit Facility are used to provide liquidity for general corporate purposes, including providing liquidity in the event of one or more settlement failures by the Company’s customers. The Company may borrow and repay amounts under the Commercial Paper Program and Credit Facility from time to time. The Company had no borrowings under the Credit Facility and the Commercial Paper Program at March 31, 2018 and December 31, 2017.
In March 2018, the Company filed a universal shelf registration statement (replacing a previously filed shelf registration statement that was set to expire) to provide additional access to capital, if needed. Pursuant to the shelf registration statement, the Company may from time to time offer to sell debt securities, guarantees of debt securities, preferred stock, Class A common stock, depository shares, purchase contracts, units or warrants in one or more offerings.
Note 10. Stockholders’ Equity
The Company’s Board of Directors has approved share repurchase programs authorizing the Company to repurchase its Class A common stock. These programs become effective after the completion of the previously authorized share repurchase program.
The following table summarizes the Company’s share repurchase authorizations of its Class A common stock through March 31, 2018, as well as historical purchases:
 
 
 
 
 
 
 
 
Board authorization dates
December
2017
 
December
2016
 
December
2015
 
 
 
 
 
 
 
 
 
 
Date program became effective
March
2018
 
April
2017
 
February 2016
 
Total
 
(in millions, except average price data)
Board authorization
$
4,000

 
$
4,000

 
$
4,000

 
$
12,000

Dollar value of shares repurchased during the three months ended March 31, 2017
$
—

 
$
—

 
$
962

 
$
962

Remaining authorization at December 31, 2017
$
4,000

 
$
1,234

 
$
—

 
$
5,234

Dollar value of shares repurchased during the three months ended March 31, 2018
$
118

 
$
1,234

 
$
—

 
$
1,352

Remaining authorization at March 31, 2018
$
3,882

 
$
—

 
$
—

 
$
3,882

Shares repurchased during the three months ended March 31, 2017
—

 
—

 
8.8

 
8.8

Average price paid per share during the three months ended March 31, 2017
$
—

 
$
—

 
$
109.06

 
$
109.06

Shares repurchased during the three months ended March 31, 2018
0.7

 
7.2

 
—

 
7.9

Average price paid per share during the three months ended March 31, 2018
$
175.87

 
$
171.11

 
$
—

 
$
171.52

Cumulative shares repurchased through March 31, 2018
0.7

 
28.2

 
40.4

 
69.3

Cumulative average price paid per share
$
175.87

 
$
141.99

 
$
99.10

 
$
117.30



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The following table presents the changes in the Company’s outstanding Class A and Class B common stock for the three months ended March 31, 2018:
 
Outstanding Shares
 
Class A
 
Class B
 
(in millions)
Balance at December 31, 2017
1,039.7

 
14.1

Purchases of treasury stock
(7.9
)
 
—

Share-based payments
1.5

 
—

Conversion of Class B to Class A common stock
0.3

 
(0.3
)
Balance at March 31, 2018
1,033.6

 
13.8

Note 11. Accumulated Other Comprehensive Income (Loss)
The changes in the balances of each component of accumulated other comprehensive income (loss), net of tax, for the three months ended March 31, 2018 and 2017 were as follows:
 
Foreign Currency Translation Adjustments 1
 
Translation Adjustments on Net Investment Hedge 2
 
Defined Benefit Pension and Other Postretirement Plans
 
Investment Securities Available-for-Sale
 
Accumulated Other Comprehensive Income (Loss)
 
(in millions)
Balance at December 31, 2016
$
(949
)
 
$
12

 
$
11

 
$
2

 
$
(924
)
Other comprehensive income (loss) for the period 3
85

 
(22
)
 
(1
)
 
(1
)
 
61

Balance at March 31, 2017
$
(864
)
 
$
(10
)
 
$
10

 
$
1


$
(863
)
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2017
$
(382
)
 
$
(141
)
 
$
25

 
$
1

 
$
(497
)
Other comprehensive income (loss) for the period 3
159

 
(33
)
 
(1
)
 
(1
)
 
124

Balance at March 31, 2018
$
(223
)
 
$
(174
)
 
$
24

 
$
—

 
$
(373
)
1  
During the three months ended March 31, 2018 and 2017, the decrease in other comprehensive loss related to foreign currency translation adjustments was driven primarily by the appreciation of the euro.
2 Balances at March 31, 2018 and December 31, 2017 include $28 million of stranded tax effects as a result of the U.S. Tax Reform.
3 
During the three months ended March 31, 2018 and 2017, gains and losses reclassified from accumulated other comprehensive income to the consolidated statement of operations were not significant.
Note 12. Share-Based Payments
During the three months ended March 31, 2018, the Company granted the following awards under the Mastercard Incorporated 2006 Long Term Incentive Plan, as amended and restated (“LTIP”). The LTIP is a shareholder-approved plan that permits the grant of various types of equity awards to employees.
 
Grants in 2018
 
Weighted-Average
Grant-Date
Fair Value
 
(in millions)
 
(per option/unit)
Non-qualified stock options
0.9
 
$41
Restricted stock units
0.9
 
$170
Performance stock units
0.1
 
$226
Stock options generally vest in four equal annual installments beginning one year after the date of grant and have a term of ten years. The Company used the Black-Scholes option pricing model to estimate the grant-date fair value of stock options and


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calculated the expected term and the expected volatility based on historical Mastercard information. The expected term of stock options granted in 2018 was determined to be six years, while the expected volatility was determined to be 19.7%.
Vesting of the shares underlying the restricted stock units and performance stock units will generally occur three years after the date of grant. The fair value of restricted stock units is determined and fixed on the grant date based on the Company’s Class A common stock price, adjusted for the exclusion of dividend equivalents. The Monte Carlo simulation valuation model was used to determine the grant-date fair value of performance stock units granted.
Compensation expense is recorded net of estimated forfeitures over the shorter of the vesting period or the date the individual becomes eligible to retire under the LTIP. The Company uses the straight-line method of attribution over the requisite service period for expensing equity awards.
Note 13. Income Taxes
The effective income tax rates were 17.3% and 26.9% for the three months ended March 31, 2018 and 2017, respectively. The lower effective tax rate, as compared to the prior year, was primarily due to a lower enacted statutory tax rate in the United States. On December 22, 2017, the U.S. passed comprehensive tax legislation which, among other things, reduces the U.S. corporate income tax rate from 35% to 21% in 2018. The improved rate for the period was also attributable to discrete benefits for share-based payments.
While the effective date for most of the 2017 U.S. Tax Reform provisions was January 1, 2018, GAAP required the resulting tax effects be accounted for in the reporting period of enactment. At December 31, 2017, this included a one-time mandatory deemed repatriation tax on accumulated foreign earnings (the “Transition Tax”), the remeasurement of the Company’s net deferred tax asset balance in the U.S., the dilution of foreign tax credit benefits on the repatriation of current year foreign earnings and the recognition of a deferred tax liability resulting from the change in the Company’s indefinite reinvestment assertion for certain foreign affiliates. Also, in December 2017, the SEC staff issued guidance which allows registrants to record provisional amounts for certain aspects of the U.S. Tax Reform during a measurement period, which is not to extend beyond one year.
Consistent with the SEC guidance, the Company was able to make reasonable estimates and had recorded provisional amounts of $629 million related to the Transition Tax, $157 million charge for the remeasurement of the Company’s net deferred tax asset in the U.S. and $36 million related to the change in assertion regarding the indefinite reinvestment of foreign earnings. Each of these amounts may require further adjustments during the measurement period due to evolving analysis and interpretations of law, including issuance by the Internal Revenue Service (the “IRS”) and The Department of Treasury (“Treasury”) of Notices, regulations and, potentially, direct discussions with Treasury, as well as interpretations of how accounting for income taxes should be applied to the U.S. Tax Reform. The Company expects to complete its accounting within the prescribed measurement period.
On January 19, 2018, the IRS and Treasury issued additional administrative guidance relating to the Transition Tax. It was determined that a single spot rate, as of December 31, 2017, should be used to translate accumulated foreign earnings to U.S. dollars when calculating the Transition Tax liability, compared to the yearly average approach used in the Company’s calculation as of December 31, 2017. This additional administrative guidance has no impact on the Company’s overall effective tax rate. However, it did result in an approximately $36 million increase to its Transition Tax liability with an offsetting decrease to the deferred tax liability recorded on the change in assertion with regard to the indefinite reinvestment of certain of the Company’s foreign earnings. These offsetting charges were recorded during the three months ended March 31, 2018.
During 2014, the Company implemented an initiative to better align its legal entity and tax structure with its operational footprint outside of the U.S. This initiative resulted in a one-time taxable gain in Belgium relating to the transfer of intellectual property to a related foreign entity in the United Kingdom. This improved alignment has resulted in greater flexibility and efficiency with regard to the global deployment of cash, as well as benefits to the Company’s effective income tax rate. The Company recorded a deferred charge related to the income tax expense on intercompany profits that resulted from the transfer. The tax associated with the transfer was deferred and was being amortized utilizing a 25-year life. This deferred charge was included in other current assets and other assets on the consolidated balance sheet at December 31, 2017 in the amounts of $17 million and $352 million, respectively. In October 2016, the FASB issued accounting guidance to simplify the accounting for income tax consequences of intra-entity transfers of assets other than inventory. Under this guidance, companies are required to recognize the income tax consequences of an intra-entity asset transfer when the transfer occurs. The guidance must be applied on a modified retrospective basis through a cumulative-effect adjustment to retained earnings as of the period of adoption. The Company adopted this accounting guidance on January 1, 2018. The aforementioned deferred charge of $369 million at December 31, 2017 has been


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charged against retained earnings as a component of the cumulative-effect adjustment as of January 1, 2018. In addition, deferred taxes have also been included as a component of the cumulative-effect adjustment whereby the Company has recorded a $186 million deferred tax asset representing the temporary difference in book and tax basis of the intellectual property that was transferred to the United Kingdom. See Note 1 (Summary of Significant Accounting Policies) for additional information on the cumulative impact of the adoption of this accounting pronouncement.
The Company is subject to tax in the United States, Belgium, Singapore, the United Kingdom and various other foreign jurisdictions, as well as state and local jurisdictions.  Uncertain tax positions are reviewed on an ongoing basis and are adjusted after considering facts and circumstances, including progress of tax audits, developments in case law and closing of statutes of limitation.  Within the next twelve months, the Company believes that the resolution of certain federal, foreign and state and local examinations are reasonably possible and that a change in estimate, reducing unrecognized tax benefits, may occur. While such a change may be significant, it is not possible to provide a range of the potential change until the examinations progress further or the related statutes of limitation expire. The Company has effectively settled its U.S. federal income tax obligations through 2008, with the exception of transfer pricing issues which are settled through 2011. With limited exception, the Company is no longer subject to state and local or foreign examinations by tax authorities for years before 2010.
Note 14. Legal and Regulatory Proceedings
Mastercard is a party to legal and regulatory proceedings with respect to a variety of matters in the ordinary course of business.  Some of these proceedings are based on complex claims involving substantial uncertainties and unascertainable damages.  Accordingly, except as discussed below, it is not possible to determine the probability of loss or estimate damages, and therefore, Mastercard has not established reserves for any of these proceedings.  When the Company determines that a loss is both probable and reasonably estimable, Mastercard records a liability and discloses the amount of the liability if it is material. When a material loss contingency is only reasonably possible, Mastercard does not record a liability, but instead discloses the nature and the amount of the claim, and an estimate of the loss or range of loss, if such an estimate can be made. Unless otherwise stated below with respect to these matters, Mastercard cannot provide an estimate of the possible loss or range of loss based on one or more of the following reasons: (1) actual or potential plaintiffs have not claimed an amount of monetary damages or the amounts are unsupportable or exaggerated, (2) the matters are in early stages, (3) there is uncertainty as to the outcome of pending appeals or motions, (4) there are significant factual issues to be resolved, (5) the existence in many such proceedings of multiple defendants or potential defendants whose share of any potential financial responsibility has yet to be determined, and/or (6) there are novel legal issues presented. Furthermore, except as identified with respect to the matters below, Mastercard does not believe that the outcome of any individual existing legal or regulatory proceeding to which it is a party will have a material adverse effect on its results of operations, financial condition or overall business.  However, an adverse judgment or other outcome or settlement with respect to any proceedings discussed below could result in fines or payments by Mastercard and/or could require Mastercard to change its business practices. In addition, an adverse outcome in a regulatory proceeding could lead to the filing of civil damage claims and possibly result in significant damage awards. Any of these events could have a material adverse effect on Mastercard’s results of operations, financial condition and overall business.
Interchange Litigation and Regulatory Proceedings
Mastercard’s interchange fees and other practices are subject to regulatory and/or legal review and/or challenges in a number of jurisdictions, including the proceedings described below. When taken as a whole, the resulting decisions, regulations and legislation with respect to interchange fees and acceptance practices may have a material adverse effect on the Company’s prospects for future growth and its overall results of operations, financial position and cash flows.
United States. In June 2005, the first of a series of complaints were filed on behalf of merchants (the majority of the complaints were styled as class actions, although a few complaints were filed on behalf of individual merchant plaintiffs) against Mastercard International, Visa U.S.A., Inc., Visa International Service Association and a number of financial institutions. Taken together, the claims in the complaints were generally brought under both Sections 1 and 2 of the Sherman Act, which prohibit monopolization and attempts or conspiracies to monopolize a particular industry, and some of these complaints contain unfair competition law claims under state law. The complaints allege, among other things, that Mastercard, Visa, and certain financial institutions conspired to set the price of interchange fees, enacted point of sale acceptance rules (including the no surcharge rule) in violation of antitrust laws and engaged in unlawful tying and bundling of certain products and services. The cases were consolidated for pre-trial proceedings in the U.S. District Court for the Eastern District of New York in MDL No. 1720. The plaintiffs filed a consolidated class action complaint that seeks treble damages.


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In July 2006, the group of purported merchant class plaintiffs filed a supplemental complaint alleging that Mastercard’s initial public offering of its Class A Common Stock in May 2006 (the “IPO”) and certain purported agreements entered into between Mastercard and financial institutions in connection with the IPO: (1) violate U.S. antitrust laws and (2) constituted a fraudulent conveyance because the financial institutions allegedly attempted to release, without adequate consideration, Mastercard’s right to assess them for Mastercard’s litigation liabilities. The class plaintiffs sought treble damages and injunctive relief including, but not limited to, an order reversing and unwinding the IPO.
In February 2011, Mastercard and Mastercard International entered into each of: (1) an omnibus judgment sharing and settlement sharing agreement with Visa Inc., Visa U.S.A. Inc. and Visa International Service Association and a number of financial institutions; and (2) a Mastercard settlement and judgment sharing agreement with a number of financial institutions.  The agreements provide for the apportionment of certain costs and liabilities which Mastercard, the Visa parties and the financial institutions may incur, jointly and/or severally, in the event of an adverse judgment or settlement of one or all of the cases in the merchant litigations.  Among a number of scenarios addressed by the agreements, in the event of a global settlement involving the Visa parties, the financial institutions and Mastercard, Mastercard would pay 12% of the monetary portion of the settlement. In the event of a settlement involving only Mastercard and the financial institutions with respect to their issuance of Mastercard cards, Mastercard would pay 36% of the monetary portion of such settlement. 
In October 2012, the parties entered into a definitive settlement agreement with respect to the merchant class litigation (including with respect to the claims related to the IPO) and the defendants separately entered into a settlement agreement with the individual merchant plaintiffs. The settlements included cash payments that were apportioned among the defendants pursuant to the omnibus judgment sharing and settlement sharing agreement described above. Mastercard also agreed to provide class members with a short-term reduction in default credit interchange rates and to modify certain of its business practices, including its “no surcharge” rule. The court granted final approval of the settlement in December 2013, and objectors to the settlement appealed that decision to the U.S. Court of Appeals for the Second Circuit. In June 2016, the court of appeals vacated the class action certification, reversed the settlement approval and sent the case back to the district court for further proceedings. The court of appeals’ ruling was based primarily on whether the merchants were adequately represented by counsel in the settlement.
Prior to the reversal of the settlement approval, merchants representing slightly more than 25% of the Mastercard and Visa purchase volume over the relevant period chose to opt out of the class settlement. Mastercard had anticipated that most of the larger merchants who opted out of the settlement would initiate separate actions seeking to recover damages, and over 30 opt-out complaints have been filed on behalf of numerous merchants in various jurisdictions. Mastercard has executed settlement agreements with a number of opt-out merchants. Mastercard believes these settlement agreements are not impacted by the ruling of the court of appeals. The defendants have consolidated all of these matters (except for two state court actions) in front of the same federal district court that approved the merchant class settlement. In July 2014, the district court denied the defendants’ motion to dismiss the opt-out merchant complaints for failure to state a claim. Deposition discovery commenced in December 2016 and the parties in the class action are in mediation.
As of March 31, 2018, Mastercard had accrued a liability of $737 million as a reserve for both the merchant class litigation and the filed and anticipated opt-out merchant cases. As of March 31, 2018 and December 31, 2017, Mastercard had $548 million and $546 million, respectively, in a qualified cash settlement fund related to the merchant class litigation and classified as restricted cash on its consolidated balance sheet. In the first quarter of 2018, Mastercard increased the reserve for opt-out merchant cases by $27 million to reflect current settlement discussions. Mastercard believes the reserve for both the merchant class litigation and the filed and anticipated opt-out merchants represents its best estimate of its probable liabilities in these matters at March 31, 2018. The portion of the accrued liability relating to both the opt-out merchants and the merchant class litigation settlement does not represent an estimate of a loss, if any, if the matters were litigated to a final outcome. Mastercard cannot estimate the potential liability if that were to occur.
Canada. In December 2010, a proposed class action complaint was commenced against Mastercard in Quebec on behalf of Canadian merchants. The suit essentially repeated the allegations and arguments of a previously filed application by the Canadian Competition Bureau to the Canadian Competition Tribunal (dismissed in Mastercard’s favor) concerning certain Mastercard rules related to point-of-sale acceptance, including the “honor all cards” and “no surcharge” rules. The Quebec suit sought compensatory and punitive damages in unspecified amounts, as well as injunctive relief. In the first half of 2011, additional purported class action lawsuits were commenced in British Columbia and Ontario against Mastercard, Visa and a number of large Canadian financial institutions. The British Columbia suit sought compensatory damages in unspecified amounts, and the Ontario suit sought compensatory damages of $5 billion on the basis of alleged conspiracy and various alleged breaches of the Canadian


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Competition Act. Additional purported class action complaints were commenced in Saskatchewan and Alberta with claims that largely mirror those in the other suits. In June 2017, Mastercard entered into a class settlement agreement to resolve all of the Canadian class action litigation. The settlement, which is subject to court approval in each applicable province, requires Mastercard to make a cash payment and modify its “no surcharge” rule. During the first quarter of 2017, the Company recorded a provision for litigation of $15 million related to this matter.
Europe. In July 2015, the European Commission issued a Statement of Objections related to Mastercard’s interregional interchange fees and central acquiring rules within the European Economic Area (the “EEA”). The Statement of Objections, which follows an investigation opened in 2013, includes preliminary conclusions concerning the alleged anticompetitive effects of these practices. The European Commission has indicated it intends to seek fines if these conclusions are subsequently confirmed. In April 2016, Mastercard submitted a response to the Statement of Objections disputing the European Commission’s preliminary conclusions and participated in a related oral hearing in May 2016. Since that time, Mastercard has remained in discussions with the European Commission. Although the Statement of Objections does not quantify the level of fines, based upon recent interactions with the European Commission, it is possible that they could be substantial, potentially in excess of $1 billion if the European Commission were to issue a negative decision.  Fines may be less than this amount in the event of a negotiated resolution. Due to the uncertainty of numerous legal issues, including the potential for a negotiated resolution, Mastercard cannot estimate a possible range of loss at this time, although Mastercard expects to obtain greater clarity with respect to these issues in the second or third quarter of 2018.
In the United Kingdom, beginning in May 2012, a number of retailers filed claims or threatened litigation against Mastercard seeking damages for alleged anti-competitive conduct with respect to Mastercard’s cross-border interchange fees and its U.K. and Ireland domestic interchange fees (the “U.K. Merchant claimants”), with claimed purported damages exceeding $1 billion. The U.K. Merchant claimants (including all resolved matters) represent approximately 40% of Mastercard’s U.K. interchange volume over the relevant damages period. Mastercard submitted statements of defense to the retailers’ claims disputing liability and damages. Since June 2015, Mastercard has recorded litigation provisions for settlements, judgments and legal fees relating to these claims in an aggregate amount of $197 million, including a charge of $19 million in the first quarter of 2018 relating to settlements with a number of U.K. Merchant claimants. This aggregate amount also includes a litigation provision of $107 million recorded in the second quarter of 2016 for the amount of a judgment (which Mastercard is appealing) issued by a tribunal following the conclusion of a trial for liability and damages for one of the U.K. merchant cases.
In January 2017, Mastercard received a liability judgment in its favor on all significant matters in a separate action brought by ten of the U.K. Merchant claimants, who had been seeking in excess of $500 million in damages. Subsequently, Mastercard settled with six of these claimants to resolve their claims, with no financial payments required by Mastercard. Three of the U.K. Merchant claimants are appealing the judgment. Oral argument on these appeals (as well as on Mastercard’s appeal described above) was held in late April 2018.
Additional merchants have filed or threatened litigation with respect to interchange rates in Europe (the “Pan-European claimants”) for purported damages exceeding $1 billion.  Mastercard submitted statements of defense to the retailers’ claims disputing liability and damages. During the first quarter of 2018, Mastercard recorded a charge of $70 million resulting from settlements with over 70 Pan-European claimants, which represented over 60% of the Pan-European claimants’ merchant damages claims.
In September 2016, a proposed collective action was filed in the United Kingdom on behalf of U.K. consumers seeking damages for intra-EEA and domestic U.K. interchange fees that were allegedly passed on to consumers by merchants between 1992 and 2008. The complaint, which seeks to leverage the European Commission’s 2007 decision on intra-EEA interchange fees, claims damages in an amount that exceeds £14 billion (approximately $20 billion as of March 31, 2018). In July 2017, the court denied the plaintiffs’ application for the case to proceed as a collective action.  The plaintiffs’ request for permission to appeal this decision was denied, which they have appealed. The plaintiffs have also filed a separate request for judicial review of the court’s denial of their collective action.
ATM Non-Discrimination Rule Surcharge Complaints
In October 2011, a trade association of independent Automated Teller Machine (“ATM”) operators and 13 independent ATM operators filed a complaint styled as a class action lawsuit in the U.S. District Court for the District of Columbia against both Mastercard and Visa (the “ATM Operators Complaint”).  Plaintiffs seek to represent a class of non-bank operators of ATM terminals that operate in the United States with the discretion to determine the price of the ATM access fee for the terminals they operate.


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Plaintiffs allege that Mastercard and Visa have violated Section 1 of the Sherman Act by imposing rules that require ATM operators to charge non-discriminatory ATM surcharges for transactions processed over Mastercard’s and Visa’s respective networks that are not greater than the surcharge for transactions over other networks accepted at the same ATM.  Plaintiffs seek both injunctive and monetary relief equal to treble the damages they claim to have sustained as a result of the alleged violations and their costs of suit, including attorneys’ fees.  Plaintiffs have not quantified their damages although they allege that they expect damages to be in the tens of millions of dollars. 
Subsequently, multiple related complaints were filed in the U.S. District Court for the District of Columbia alleging both federal antitrust and multiple state unfair competition, consumer protection and common law claims against Mastercard and Visa on behalf of putative classes of users of ATM services (the “ATM Consumer Complaints”).  The claims in these actions largely mirror the allegations made in the ATM Operators Complaint, although these complaints seek damages on behalf of consumers of ATM services who pay allegedly inflated ATM fees at both bank and non-bank ATM operators as a result of the defendants’ ATM rules.  Plaintiffs seek both injunctive and monetary relief equal to treble the damages they claim to have sustained as a result of the alleged violations and their costs of suit, including attorneys’ fees.  Plaintiffs have not quantified their damages although they allege that they expect damages to be in the tens of millions of dollars. 
In January 2012, the plaintiffs in the ATM Operators Complaint and the ATM Consumer Complaints filed amended class action complaints that largely mirror their prior complaints. In February 2013, the district court granted Mastercard’s motion to dismiss the complaints for failure to state a claim. On appeal, the Court of Appeals reversed the district court’s order in August 2015 and sent the case back for further proceedings.
U.S. Liability Shift Litigation
In March 2016, a proposed U.S. merchant class action complaint was filed in federal court in California alleging that Mastercard, Visa, American Express and Discover (the “Network Defendants”), EMVCo, and a number of issuing banks (the “Bank Defendants”) engaged in a conspiracy to shift fraud liability for card present transactions from issuing banks to merchants not yet in compliance with the standards for EMV chip cards in the United States (the “EMV Liability Shift”), in violation of the Sherman Act and California law.  Plaintiffs allege damages equal to the value of all chargebacks for which class members became liable as a result of the EMV Liability Shift on October 1, 2015. The plaintiffs seek treble damages, attorney’s fees and costs and an injunction against future violations of governing law, and the defendants have filed a motion to dismiss. In September 2016, the court denied the Network Defendants’ motion to dismiss the complaint, but granted such a motion for EMVCo and the Bank Defendants. In May 2017, the court transferred the case to New York so that discovery could be coordinated with the U.S. merchant class interchange litigation described above. In March 2018, the district court denied the plaintiffs’ motion for class certification, while permitting them to re-file.
Telephone Consumer Protection Class Action
Mastercard is a defendant in a Telephone Consumer Protection Act (“TCPA”) class action pending in Florida. The plaintiffs are individuals and businesses who allege that approximately 381,000 unsolicited faxes were sent to them advertising a Mastercard co-brand card issued by First Arkansas Bank (“FAB”). The TCPA provides for uncapped statutory damages of $500 per fax. Mastercard has asserted various defenses to the claims, and has notified FAB of an indemnity claim that it has (which FAB has disputed). Class certification briefing is expected to begin in May 2018.
Note 15. Settlement and Other Risk Management
Mastercard’s rules guarantee the settlement of many of the Mastercard, Cirrus and Maestro branded transactions between its issuers and acquirers (“settlement risk”). Settlement exposure is the outstanding settlement risk to customers under Mastercard’s rules due to the difference in timing between the payment transaction date and subsequent settlement. While the term and amount of the guarantee are unlimited, the duration of settlement exposure is short term and typically limited to a few days. Gross settlement exposure is estimated using the average daily card volume during the quarter multiplied by the estimated number of days to settle. The Company has global risk management policies and procedures, which include risk standards, to provide a framework for managing the Company’s settlement risk. Customer-reported transaction data and the transaction clearing data underlying the settlement exposure calculation may be revised in subsequent reporting periods.


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (Continued)


In the event that Mastercard effects a payment on behalf of a failed customer, Mastercard may seek an assignment of the underlying receivables of the failed customer. Customers may be charged for the amount of any settlement loss incurred during the ordinary course activities of the Company.
The Company has global risk management policies and procedures aimed at managing the settlement exposure. These risk management procedures include interaction with the bank regulators of countries in which it operates, requiring customers to make adjustments to settlement processes, and requiring collateral from customers. As part of its policies, Mastercard requires certain customers that are not in compliance with the Company’s risk standards in effect at the time of review to post collateral, typically in the form of cash, letters of credit, or guarantees. This requirement is based on management’s review of the individual risk circumstances for each customer that is out of compliance. In addition to these amounts, Mastercard holds collateral to cover variability and future growth in customer programs. The Company may also hold collateral to pay merchants in the event of an acquirer failure. Although the Company is not contractually obligated under its rules to effect such payments to merchants, the Company may elect to do so to protect brand integrity. Mastercard monitors its credit risk portfolio on a regular basis and the adequacy of collateral on hand. Additionally, from time to time, the Company reviews its risk management methodology and standards. As such, the amounts of estimated settlement exposure are revised as necessary.
The Company’s estimated settlement exposure from Mastercard, Cirrus and Maestro branded transactions was as follows:
 
March 31,
2018
 
December 31,
2017
 
(in millions)
Gross settlement exposure
$
47,157

 
$
47,002

Collateral held for settlement exposure
(4,816
)
 
(4,360
)
Net uncollateralized settlement exposure
$
42,341

 
$
42,642

General economic and political conditions in countries in which Mastercard operates affect the Company’s settlement risk. Many of the Company’s financial institution customers have been directly and adversely impacted by political instability and uncertain economic conditions. These conditions present increased risk that the Company may have to perform under its settlement guarantee. This risk could increase if political, economic and financial market conditions deteriorate further. The Company’s global risk management policies and procedures are revised and enhanced from time to time. Historically, the Company has experienced a low level of losses from financial institution failures.
Mastercard also provides guarantees to customers and certain other counterparties indemnifying them from losses stemming from failures of third parties to perform duties. This includes guarantees of Mastercard-branded travelers cheques issued, but not yet cashed of $395 million at March 31, 2018 and December 31, 2017, of which $313 million is mitigated by collateral arrangements. In addition, the Company enters into agreements in the ordinary course of business under which the Company agrees to indemnify third parties against damages, losses and expenses incurred in connection with legal and other proceedings arising from relationships or transactions with the Company. Certain indemnifications do not provide a stated maximum exposure. As the extent of the Company’s obligations under these agreements depends entirely upon the occurrence of future events, the Company’s potential future liability under these agreements is not determinable. Historically, payments made by the Company under these types of contractual arrangements have not been material.
Note 16. Foreign Exchange Risk Management
The Company monitors and manages its foreign currency exposures as part of its overall risk management program which focuses on the unpredictability of financial markets and seeks to reduce the potentially adverse effects that the volatility of these markets may have on its operating results.  A primary objective of the Company’s risk management strategies is to reduce the financial impact that may arise from volatility in foreign currency exchange rates principally through the use of both foreign currency derivative contracts (Derivatives) and foreign currency denominated debt (Net Investment Hedge).
Derivatives
The Company enters into foreign currency derivative contracts to manage risk associated with anticipated receipts and disbursements which are valued based on currencies other than the functional currencies of the entity. The Company may also enter into foreign currency derivative contracts to offset possible changes in value due to foreign exchange fluctuations of earnings,


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Table of Contents
MASTERCARD INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (Continued)


assets and liabilities. The objective of these activities is to reduce the Company’s exposure to gains and losses resulting from fluctuations of foreign currencies against its functional currencies.
As of March 31, 2018 and December 31, 2017, the majority of derivative contracts to hedge foreign currency fluctuations had been entered into with customers of Mastercard. Mastercard’s derivative contracts are summarized below:
 
March 31, 2018
 
December 31, 2017
 
Notional
 
Estimated Fair
Value
 
Notional
 
Estimated Fair
Value
 
(in millions)
Commitments to purchase foreign currency
$
58

 
$
1

 
$
27

 
$
—

Commitments to sell foreign currency
1,041

 
(32
)
 
968

 
(26
)
Options to sell foreign currency
31

 
3

 
27

 
2

Balance sheet location
 
 
 
 
 
 
 
Accounts receivable 1
 
 
$
9

 
 
 
$
6

Other current liabilities 1
 
 
(37
)
 
 
 
(30
)
1 The derivative contracts are subject to enforceable master netting arrangements, which contain various netting and setoff provisions.
The amount of gain (loss) recognized in income for the contracts to purchase and sell foreign currency is summarized below: 
 
Three Months Ended March 31,
 
2018
 
2017