MASTERCARD INC, 10-K filed on 2/13/2019
Annual Report
v3.10.0.1
Document and Entity Information - USD ($)
$ in Billions
12 Months Ended
Dec. 31, 2018
Feb. 08, 2019
Jun. 29, 2018
Entity Registrant Name MASTERCARD INC    
Trading Symbol MA    
Entity Central Index Key 0001141391    
Current Fiscal Year End Date --12-31    
Entity Filer Category Large Accelerated Filer    
Document Type 10-K    
Document Period End Date Dec. 31, 2018    
Document Fiscal Year Focus 2018    
Document Fiscal Period Focus Q4    
Amendment Flag false    
Entity Small Business false    
Entity Emerging Growth Company false    
Entity Shell Company false    
Entity Well-known Seasoned Issuer Yes    
Entity Voluntary Filers No    
Entity Current Reporting Status Yes    
Entity Public Float     $ 179.5
Class A Common Stock      
Entity Common Stock, Shares Outstanding   1,014,237,644  
Class B Common Stock      
Entity Common Stock, Shares Outstanding   11,671,404  
v3.10.0.1
Consolidated Balance Sheet - USD ($)
$ in Millions
Dec. 31, 2018
Dec. 31, 2017
ASSETS    
Cash and cash equivalents $ 6,682 $ 5,933
Restricted cash for litigation settlement 553 546
Investments 1,696 1,849
Accounts receivable 2,276 1,969
Settlement due from customers 2,452 1,375
Restricted security deposits held for customers 1,080 1,085
Prepaid expenses and other current assets 1,432 1,040
Total Current Assets 16,171 13,797
Property, plant and equipment, net 921 829
Deferred income taxes 570 250
Goodwill 2,904 3,035
Other intangible assets, net 991 1,120
Other assets 3,303 2,298
Total Assets 24,860 21,329
LIABILITIES, REDEEMABLE NON-CONTROLLING INTERESTS AND EQUITY    
Accounts payable 537 933
Settlement due to customers 2,189 1,343
Restricted security deposits held for customers 1,080 1,085
Accrued litigation 1,591 709
Accrued expenses 4,747 3,931
Current portion of long-term debt 500 0
Other current liabilities 949 792
Total Current Liabilities 11,593 8,793
Long-term debt 5,834 5,424
Deferred income taxes 67 106
Other liabilities 1,877 1,438
Total Liabilities 19,371 15,761
Commitments and Contingencies
Redeemable non-controlling interests 71 71
Stockholders’ Equity    
Additional paid-in-capital 4,580 4,365
Class A treasury stock, at cost, 368 and 342 shares, respectively (25,750) (20,764)
Retained earnings 27,283 22,364
Accumulated other comprehensive income (loss) (718) (497)
Total Stockholders’ Equity 5,395 5,468
Non-controlling interests 23 29
Total Equity 5,418 5,497
Total Liabilities, Redeemable Non-controlling Interests and Equity 24,860 21,329
Class A Common Stock    
Stockholders’ Equity    
Common stock value 0 0
Total Equity 0 0
Class B Common Stock    
Stockholders’ Equity    
Common stock value 0 0
Total Equity $ 0 $ 0
v3.10.0.1
Consolidated Balance Sheet (Parenthetical) - $ / shares
Dec. 31, 2018
Dec. 31, 2017
Class A treasury stock, shares 368,000,000 342,000,000
Class A Common Stock    
Common stock, par value $ 0.0001 $ 0.0001
Common stock, authorized shares 3,000,000,000 3,000,000,000
Common stock, issued 1,387,000,000 1,382,000,000
Common stock, outstanding 1,019,000,000 1,040,000,000
Class B Common Stock    
Common stock, par value $ 0.0001 $ 0.0001
Common stock, authorized shares 1,200,000,000 1,200,000,000
Common stock, issued 12,000,000 14,000,000
Common stock, outstanding 12,000,000 14,000,000
v3.10.0.1
Consolidated Statement of Operations - USD ($)
shares in Millions, $ in Millions
12 Months Ended
Dec. 31, 2018
Dec. 31, 2017
Dec. 31, 2016
Income Statement [Abstract]      
Net revenue $ 14,950 $ 12,497 $ 10,776
Operating Expenses      
General and administrative 5,174 4,653 3,827
Advertising and marketing 907 771 698
Depreciation and amortization 459 436 373
Provision for litigation 1,128 15 117
Total operating expenses 7,668 5,875 5,015
Operating income 7,282 6,622 5,761
Other Income (Expense)      
Investment income 122 56 43
Interest expense (186) (154) (95)
Other income (expense), net (14) (2) (63)
Total other income (expense) (78) (100) (115)
Income before income taxes 7,204 6,522 5,646
Income tax expense 1,345 2,607 1,587
Net Income $ 5,859 $ 3,915 $ 4,059
Basic Earnings per Share $ 5.63 $ 3.67 $ 3.70
Basic weighted-average shares outstanding 1,041 1,067 1,098
Diluted Earnings per Share $ 5.60 $ 3.65 $ 3.69
Diluted weighted-average shares outstanding 1,047 1,072 1,101
v3.10.0.1
Consolidated Statement of Comprehensive Income - USD ($)
$ in Millions
12 Months Ended
Dec. 31, 2018
Dec. 31, 2017
Dec. 31, 2016
Statement of Comprehensive Income [Abstract]      
Net Income $ 5,859 $ 3,915 $ 4,059
Other comprehensive income (loss):      
Foreign currency translation adjustments (319) 565 (275)
Income tax effect 40 2 (11)
Foreign currency translation adjustments, net of income tax effect (279) 567 (286)
Translation adjustments on net investment hedge 96 (236) 60
Income tax effect (21) 83 (22)
Translation adjustments on net investment hedge, net of income tax effect 75 (153) 38
Defined benefit pension and other postretirement plans (18) 15 (2)
Income tax effect 3 (1) 0
Defined benefit pension and other postretirement plans, net of income tax effect (15) 14 (2)
Investment securities available-for-sale (3) (3) 3
Income tax effect 1 2 (1)
Investment securities available-for-sale, net of income tax effect (2) (1) 2
Other comprehensive income (loss), net of income tax effect (221) 427 (248)
Comprehensive Income $ 5,638 $ 4,342 $ 3,811
v3.10.0.1
Consolidated Statement of Changes in Equity - USD ($)
$ in Millions
Total
Retained Earnings
Accumulated Other Comprehensive Income (Loss)
Additional Paid-In Capital
Class A Treasury Stock
Non- Controlling Interests
Class A Common Stock
Class B Common Stock
Balance at Dec. 31, 2015 $ 6,062 $ 16,222 $ (676) $ 4,004 $ (13,522) $ 34 $ 0 $ 0
Net income 4,059 4,059            
Activity related to non-controlling interests (6)         (6)    
Other comprehensive income (loss), net of tax (248)   (248)          
Cash dividends declared on Class A and Class B common stock (863) (863)            
Purchases of treasury stock (3,503)       (3,503)      
Shared-based payments 183     179 4      
Conversion of Class B to Class A common stock 0              
Balance at Dec. 31, 2016 5,684 19,418 (924) 4,183 (17,021) 28 0 0
Net income 3,915 3,915            
Activity related to non-controlling interests 1         1    
Other comprehensive income (loss), net of tax 427   427          
Cash dividends declared on Class A and Class B common stock (969) (969)            
Purchases of treasury stock (3,747)       (3,747)      
Shared-based payments 186     182 4      
Conversion of Class B to Class A common stock 0              
Balance at Dec. 31, 2017 5,497 22,364 (497) 4,365 (20,764) 29 0 0
Net income 5,859 5,859            
Activity related to non-controlling interests (6)         (6)    
Other comprehensive income (loss), net of tax (221)   (221)          
Cash dividends declared on Class A and Class B common stock (1,123) (1,123)            
Purchases of treasury stock (4,991)     0 (4,991)      
Shared-based payments 220     215 5      
Conversion of Class B to Class A common stock 0              
Balance at Dec. 31, 2018 5,418 27,283 $ (718) $ 4,580 $ (25,750) $ 23 $ 0 $ 0
Cumulative Effect of New Accounting Principle in Period of Adoption | Adoption of revenue standard 366 366            
Cumulative Effect of New Accounting Principle in Period of Adoption | Adoption of intra-entity asset transfers standard $ (183) $ (183)            
v3.10.0.1
Consolidated Statement of Changes in Equity (Parenthetical) - $ / shares
12 Months Ended
Dec. 31, 2018
Dec. 31, 2017
Dec. 31, 2016
Statement of Stockholders' Equity [Abstract]      
Cash dividends declared on Class A and Class B common stock, per share $ 1.08 $ 0.91 $ 0.79
v3.10.0.1
Consolidated Statement of Cash Flows - USD ($)
$ in Millions
12 Months Ended
Dec. 31, 2018
Dec. 31, 2017
Dec. 31, 2016
Operating Activities      
Net income $ 5,859 $ 3,915 $ 4,059
Adjustments to reconcile net income to net cash provided by operating activities:      
Amortization of customer and merchant incentives 1,235 1,001 860
Depreciation and amortization 459 437 373
Share-based compensation 196 176 149
Tax benefit for share-based payments 0 0 (48)
Deferred income taxes (244) 86 (20)
Venezuela charge 0 167 0
Other 31 59 29
Changes in operating assets and liabilities:      
Accounts receivable (317) (445) (338)
Income taxes receivable (120) (8) (1)
Settlement due from customers (1,078) (281) (10)
Prepaid expenses (1,769) (1,402) (1,073)
Accrued litigation and legal settlements 869 (12) 17
Restricted security deposits held for customers (6) 94 96
Accounts payable 101 290 145
Settlement due to customers 849 394 66
Accrued expenses 439 589 520
Long-term taxes payable (20) 577 0
Net change in other assets and liabilities (261) 27 (187)
Net cash provided by operating activities 6,223 5,664 4,637
Investing Activities      
Purchases of investment securities available-for-sale (1,300) (714) (957)
Purchases of investments held-to-maturity (509) (1,145) (867)
Proceeds from sales of investment securities available-for-sale 604 304 277
Proceeds from maturities of investment securities available-for-sale 379 500 339
Proceeds from maturities of investments held-to-maturity 929 1,020 456
Purchases of property, plant and equipment (330) (300) (215)
Capitalized software (174) (123) (167)
Acquisition of businesses, net of cash acquired 0 (1,175) 0
Investment in nonmarketable equity investments (91) (147) (31)
Other investing activities (14) (1) 2
Net cash used in investing activities (506) (1,781) (1,163)
Financing Activities      
Purchases of treasury stock (4,933) (3,762) (3,511)
Proceeds from debt 991 0 1,972
Payment of debt 0 (64) 0
Dividends paid (1,044) (942) (837)
Tax benefit for share-based payments 0 0 48
Tax withholdings related to share-based payments (80) (47) (51)
Cash proceeds from exercise of stock options 104 57 37
Other financing activities (4) (6) (2)
Net cash used in financing activities (4,966) (4,764) (2,344)
Effect of exchange rate changes on cash, cash equivalents, restricted cash and restricted cash equivalents (6) 200 (50)
Net increase (decrease) in cash, cash equivalents, restricted cash and restricted cash equivalents 745 (681) 1,080
Cash, cash equivalents, restricted cash and restricted cash equivalents - beginning of period 7,592 8,273 7,193
Cash, cash equivalents, restricted cash and restricted cash equivalents - end of period $ 8,337 $ 7,592 $ 8,273
v3.10.0.1
Summary of Significant Accounting Policies
12 Months Ended
Dec. 31, 2018
Accounting Policies [Abstract]  
Summary of Significant Accounting Policies
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. The Company makes payments easier and more efficient by creating a wide range of payment solutions and services through a family of well-known brands, including Mastercard®, Maestro® and Cirrus®. The Company is a multi-rail network. Through its core global payments processing network, Mastercard facilitates the switching (authorization, clearing and settlement) of payment transactions, and delivers related products and services. With additional payment capabilities that include real-time account based payments (including automated clearing house (“ACH”) transactions), Mastercard offers customers one partner to turn to for their payment needs for both domestic and cross-border transactions across multiple payment flows. The Company also provides value-added offerings such as safety and security products, information and analytics services, consulting, loyalty and reward programs and issuer and acquirer processing. The Company’s payment solutions are designed to ensure safety and security for the global payments system.
A typical transaction on the Company’s core network involves four participants in addition to the Company: account holder (a consumer who holds a card or uses another device enabled for payment), issuer (the account holder’s financial institution), merchant and acquirer (the merchant’s financial institution). The Company does not issue cards, extend credit, determine or receive revenue from interest rates or other fees charged to account holders by issuers, or establish the rates charged by acquirers in connection with merchants’ acceptance of the Company’s branded products. In most cases, account holder relationships belong to, and are managed by, the Company’s financial institution customers.
Significant Accounting Policies
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. Investments in VIEs for which the Company is not considered the primary beneficiary are not consolidated and are accounted for as equity method or cost method investments and recorded in other assets on the consolidated balance sheet.  At December 31, 2018 and 2017, there were no significant VIEs which required consolidation and the investments were not considered material to the consolidated financial statements. Intercompany transactions and balances have been eliminated in consolidation. Certain prior period amounts have been reclassified to conform to the 2018 presentation. For 2017 and 2016, $127 million and $113 million, respectively, of expenses were reclassified from advertising and marketing expenses to general and administrative expenses.  The reclassification had no impact on total operating expenses, operating income or net income. The Company follows accounting principles generally accepted in the United States of America (“GAAP”).
Prior to December 31, 2017, the Company included the financial results from its Venezuela subsidiaries in the consolidated financial statements using the consolidation method of accounting. In 2017, due to foreign exchange regulations restricting access to U.S. dollars in Venezuela, an other-than-temporary lack of exchangeability between the Venezuelan bolivar and U.S. dollar impacted the Company’s ability to manage risk, process cross-border transactions and satisfy U.S. dollar denominated liabilities related to operations in Venezuela.  As a result of these factors, Mastercard concluded that effective December 31, 2017, it did not meet the accounting criteria for consolidation of these Venezuelan subsidiaries, and therefore would transition to the cost method of accounting as of December 31, 2017. This accounting change resulted in a pre-tax charge of $167 million ($108 million after tax or $0.10 per diluted share) that was recorded in general and administrative expenses on the consolidated statement of operations for the year ended December 31, 2017.
Non-controlling interests represent the equity interest not owned by the Company and are recorded for consolidated entities in which the Company owns less than 100% of the interests. Changes in a parent’s ownership interest while the parent retains its controlling interest are accounted for as equity transactions, and upon loss of control, retained ownership interests are remeasured at fair value, with any gain or loss recognized in earnings. For 2018, 2017 and 2016, losses from non-controlling interests were de minimis and, as a result, amounts are included on the consolidated statement of operations within other income (expense).
The Company accounts for investments in common stock or in-substance common stock under the equity method of accounting when it has the ability to exercise significant influence over the investee, generally when it holds between 20% and 50% ownership in the entity. In addition, investments in flow-through entities such as limited partnerships and limited liability companies are also accounted for under the equity method when the Company has the ability to exercise significant influence over the investee, generally when the investment ownership percentage is equal to or greater than 5% of the outstanding ownership interest. The excess of the cost over the underlying net equity of investments accounted for under the equity method is allocated to identifiable tangible and intangible assets and liabilities based on fair values at the date of acquisition. The amortization of the excess of the cost over the underlying net equity of investments and Mastercard’s share of net earnings or losses of entities accounted for under the equity method of accounting is included in other income (expense) on the consolidated statement of operations.
The Company accounts for investments in common stock or in-substance common stock under the cost method of accounting when it does not exercise significant influence, generally when it holds less than 20% ownership in the entity or when the interest in a limited partnership or limited liability company is less than 5% and the Company has no significant influence over the operation of the investee. Investments in companies that Mastercard does not control, but that are not in the form of common stock or in-substance common stock, are also accounted for under the cost method of accounting. These investments for which there is no readily determinable fair value and the cost method of accounting is used are adjusted for changes resulting from observable price changes in orderly transactions for identical or similar investments of the same issuer.
Investments for which the equity method or cost method of accounting is used are classified as nonmarketable equity investments and recorded in other assets on the consolidated balance sheet.
Use of estimates - The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting periods. Future events and their effects cannot be predicted with certainty; accordingly, accounting estimates require the exercise of judgment. The accounting estimates used in the preparation of the Company’s consolidated financial statements may change as new events occur, as more experience is acquired, as additional information is obtained and as the Company’s operating environment changes. Actual results may differ from these estimates.
Revenue recognition - Revenue is recognized to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the Company expects to be entitled to in exchange for those goods or 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.
Volume-based revenue (domestic assessments and cross-border volume fees) is recorded as revenue in the period it is earned, which is when the related volume is generated on the cards. Certain volume-based revenue is based upon information reported by customers. Transaction-based revenue is primarily based on the number and type of transactions and is recognized as revenue in the same period in which the related transactions occur. Other payment-related products and services are recognized as revenue in the period in which the related services are performed or transactions occur.
Mastercard has business agreements with certain customers that provide for rebates or other support when the customers meet certain volume hurdles as well as other support incentives such as marketing, which are tied to performance. Rebates and incentives are recorded as a reduction of revenue primarily when volume- and transaction-based revenues are recognized over the contractual term. Rebates and incentives are calculated based upon estimated performance and the terms of the related business agreements. In addition, Mastercard may make 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.
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 for these services typically occurs over the contractual term. Contract assets are included in prepaid expenses and other current assets and other assets on the consolidated balance sheet.
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.
Business combinations - The Company accounts for business combinations under the acquisition method of accounting. The Company measures the tangible and intangible identifiable assets acquired, liabilities assumed and any non-controlling interest in the acquiree, at their fair values at the acquisition date. Acquisition-related costs are expensed as incurred and are included in general and administrative expenses. Any excess of purchase price over the fair value of net assets acquired, including identifiable intangible assets, is recorded as goodwill.
Goodwill and other intangible assets - Indefinite-lived intangible assets consist of goodwill, which represents the synergies expected to arise after the acquisition date and the assembled workforce, and customer relationships. Finite-lived intangible assets consist of capitalized software costs, trademarks, tradenames, customer relationships and other intangible assets. Intangible assets with finite useful lives are amortized over their estimated useful lives, on a straight-line basis, which range from one to twenty years. Capitalized software includes internal and external costs incurred directly related to the design, development and testing phases of each capitalized software project.
Impairment of assets - Goodwill and indefinite-lived intangible assets are not amortized but are tested annually for impairment in the fourth quarter, or sooner when circumstances indicate an impairment may exist.  The impairment evaluation for goodwill utilizes a quantitative assessment. If the fair value of a reporting unit exceeds the carrying value, goodwill is not impaired. If the fair value of the reporting unit is less than its carrying value, then goodwill is impaired and the excess of the reporting unit’s carrying value over the fair value is recognized as an impairment charge.
The impairment test for indefinite-lived intangible assets consists of a qualitative assessment to evaluate relevant events and circumstances that could affect the significant inputs used to determine the fair value of indefinite-lived intangible assets.  If the qualitative assessment indicates that it is more likely than not that indefinite-lived intangible assets are impaired, then a quantitative assessment is required. 
Long-lived assets, other than goodwill and indefinite-lived intangible assets, are tested for impairment whenever events or circumstances indicate that their carrying amount may not be recoverable. If the carrying value of the asset cannot be recovered from estimated future cash flows, undiscounted and without interest, the fair value of the asset is calculated using the present value of estimated net future cash flows. If the carrying amount of the asset exceeds its fair value, an impairment is recorded.
Impairment charges, if any, are recorded in general and administrative expenses on the consolidated statement of operations.
Litigation - The Company is a party to certain legal and regulatory proceedings with respect to a variety of matters. The Company evaluates the likelihood of an unfavorable outcome of all legal or regulatory proceedings to which it is a party and accrues a loss contingency when the loss is probable and reasonably estimable. These judgments are subjective based on the status of the legal or regulatory proceedings, the merits of its defenses and consultation with in-house and external legal counsel. Legal costs are expensed as incurred and recorded in general and administrative expenses on the consolidated statement of operations.
Settlement and other risk management - Mastercard’s rules guarantee the settlement of many of the transactions between its customers. 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.
The Company also 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. 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.
The Company accounts for each of its guarantees by recording the guarantee at its fair value at the inception or modification date through earnings.
Income taxes - The Company follows an asset and liability based approach in accounting for income taxes as required under GAAP. Deferred income tax assets and liabilities are recorded to reflect the tax consequences on future years of temporary differences between the financial statement carrying amounts and income tax bases of assets and liabilities. Deferred income taxes are displayed separately as noncurrent assets and liabilities on the consolidated balance sheet. Valuation allowances are provided against assets which are not more likely than not to be realized. The Company recognizes all material tax positions, including uncertain tax positions in which it is more likely than not that the position will be sustained based on its technical merits and if challenged by the relevant taxing authorities. At each balance sheet date, unresolved uncertain tax positions are reassessed to determine whether subsequent developments require a change in the amount of recognized tax benefit. The allowance for uncertain tax positions is recorded in other current and noncurrent liabilities on the consolidated balance sheet. The Company records interest expense related to income tax matters as interest expense on the consolidated statement of operations. The Company includes penalties related to income tax matters in the income tax provision.
The Company will recognize earnings of foreign affiliates that are determined to be global intangible low taxed income (“GILTI”) in the period it arises and it will not recognize deferred taxes for basis differences that may reverse as GILTI in future years.
Cash and cash equivalents - 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 approximates fair value.
Restricted cash - The Company classifies cash and cash equivalents as restricted when it is unavailable for withdrawal or use in its general operations. The Company has the following types of restricted cash and restricted cash equivalents:
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.
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 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 regard to usage. These funds are classified on the consolidated balance sheet within prepaid expenses and other current assets and other assets.
Fair value - The Company measures certain financial assets and liabilities at fair value on a recurring basis by estimating the price that would be received upon the sale of an asset or paid to transfer a liability in an orderly transaction between market participants. The Company classifies these recurring fair value measurements into a three-level hierarchy (“Valuation Hierarchy”).
The Valuation Hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. A financial instrument’s categorization within the Valuation Hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The three levels of the Valuation Hierarchy are as follows: 
Level 1 - inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.
Level 2 - inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in inactive markets and inputs that are observable for the asset or liability.
Level 3 - inputs to the valuation methodology are unobservable and cannot be directly corroborated by observable market data.
Certain assets are measured at fair value on a nonrecurring basis. 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 valuation methods for goodwill and other intangible assets acquired in business combinations involve assumptions concerning comparable company multiples, discount rates, growth projections and other assumptions of future business conditions. The Company uses various valuation techniques to determine fair value, primarily discounted cash flows analysis, relief-from-royalty, and multi-period excess earnings for estimating the fair value of its intangible assets. The Company uses market capitalization for estimating the fair value of its reporting unit. As the assumptions employed to measure these assets are based on management’s judgment using internal and external data, these fair value determinations are classified in Level 3 of the Valuation Hierarchy.
Contingent consideration - Certain business combinations involve the potential for future payment of consideration that is contingent upon the achievement of performance milestones. These liabilities are classified within Level 3 of the Valuation Hierarchy as the inputs used to measure fair value are unobservable and require management’s judgment. The fair value of the contingent consideration at the acquisition date and subsequent periods is determined utilizing an income approach based on a Monte Carlo technique and is recorded in other current liabilities and other liabilities on the consolidated balance sheet. Changes to projected performance milestones of the acquired businesses could result in a higher or lower contingent consideration liability. Measurement period adjustments, if any, to the preliminary estimated fair value of contingent consideration as of the acquisition date will be recorded to goodwill, however, changes in fair value as a result of updated assumptions will be recorded in general and administrative expenses on the consolidated statement of operations.
Investment securities - The Company classifies investments in debt securities as available-for-sale. Available-for-sale securities that are available to meet the Company’s current operational needs are classified as current assets. Available-for-sale securities that are not available to meet the Company’s current operational needs are classified as non-current assets on the consolidated balance sheet.
The investments in debt securities are carried at fair value, with unrealized gains and losses, net of applicable taxes, recorded as a separate component of accumulated other comprehensive income (loss) on the consolidated statement of comprehensive income. Net realized gains and losses on debt securities are recognized in investment income on the consolidated statement of operations. The specific identification method is used to determine realized gains and losses.
The Company evaluates its debt securities for other-than-temporary impairment on an ongoing basis. When there has been a decline in fair value of a debt security below the amortized cost basis, the Company recognizes an other-than-temporary impairment if: (1) it has the intent to sell the security; (2) it is more likely than not that it will be required to sell the security before recovery of the amortized cost basis; or (3) it does not expect to recover the entire amortized cost basis of the security. The credit loss component of the impairment would be recognized in other income (expense), net on the consolidated statement of operations while the non-credit loss would remain in accumulated other comprehensive income (loss) until realized from a sale or an other-than-temporary impairment.
The Company classifies time deposits with maturities greater than three months as held-to-maturity. Held-to-maturity securities that mature within one year are classified as current assets while held-to-maturity securities with maturities of greater than one year are classified as non-current assets. Time deposits are carried at amortized cost on the consolidated balance sheet and are intended to be held until maturity.
Derivative financial instruments - The Company’s derivative financial instruments are recorded as either assets or liabilities on the balance sheet and measured at fair value. The Company’s foreign exchange forward and option contracts are included in Level 2 of the Valuation Hierarchy as the fair value of these contracts are based on inputs, which are observable based on broker quotes for the same or similar instruments. As the Company does not elect hedge accounting for any derivative instruments, realized and unrealized gains and losses from the change in fair value of these contracts are recognized immediately in current-period earnings. The Company’s derivative contracts hedge foreign exchange risk and are not entered into for trading or speculative purposes. The Company did not have any derivative contracts accounted for under hedge accounting as of December 31, 2018 and 2017.
The Company has numerous investments in its foreign subsidiaries.  The net assets of these subsidiaries are exposed to volatility in foreign currency exchange rates.  The Company uses foreign currency denominated debt to hedge a portion of its net investment in foreign operations against adverse movements in exchange rates. The effective portion of the foreign currency gains and losses related to the foreign currency denominated debt are reported in accumulated other comprehensive income (loss) on the consolidated balance sheet as part of the cumulative translation adjustment component of equity. The ineffective portion, if any, is recognized in earnings in the current period. The Company evaluates the effectiveness of the net investment hedge each quarter.
Settlement due from/due to customers - The Company operates systems for clearing and settling payment transactions among customers. Net settlements are generally cleared daily among customers through settlement cash accounts by wire transfer or other bank clearing means. However, some transactions may not settle until subsequent business days, resulting in amounts due from and due to customers.
Property, plant and equipment - Property, plant and equipment are stated at cost less accumulated depreciation and amortization. Depreciation and amortization is computed using the straight-line method over the estimated useful lives of the assets. Depreciation of leasehold improvements and amortization of capital leases is included in depreciation and amortization expense on the consolidated statement of operations.
The useful lives of the Company’s assets are as follows:
Asset Category
 
Estimated Useful Life
Buildings
 
30 years
Building equipment
 
10 - 15 years
Furniture and fixtures and equipment
 
3 - 5 years
Leasehold improvements
 
Shorter of life of improvement or lease term
Capital leases
 
Shorter of life of the asset or lease term

Leases - The Company enters into operating and capital leases for the use of premises and equipment. Rent expense related to lease agreements that contain lease incentives is recorded on a straight-line basis over the term of the lease.
Pension and other postretirement plans - The Company recognizes the funded status of its single-employer defined benefit pension plans and postretirement plans as assets or liabilities on its consolidated balance sheet and recognizes changes in the funded status in the year in which the changes occur through accumulated other comprehensive income (loss). The funded status is measured as the difference between the fair value of plan assets and the projected benefit obligation at December 31, the measurement date. Overfunded plans, if any, are aggregated and recorded in other assets, while underfunded plans are aggregated and recorded as accrued expenses and other liabilities on the consolidated balance sheet.
Net periodic pension and postretirement benefit cost/(income), excluding the service cost component, is recognized in other income (expense) on the consolidated statement of operations. These costs include interest cost, expected return on plan assets, amortization of prior service costs or credits and gains or losses previously recognized as a component of accumulated other comprehensive income (loss). The service cost component is recognized in general and administrative expenses on the consolidated statement of operations.
Defined contribution plans - The Company’s contributions to defined contribution plans are recorded when employees render service to the Company. The charge is recorded in general and administrative expenses on the consolidated statement of operations.
Advertising and marketing - Expenses incurred to promote Mastercard’s products, services and brand are recognized in advertising and marketing on the consolidated statement of operations. The cost of media advertising is expensed when the advertising takes place. Advertising production costs are expensed as incurred. Promotional items are expensed at the time the promotional event occurs. Sponsorship costs are recognized over the period of benefit.
Foreign currency remeasurement and translation - Monetary assets and liabilities are remeasured to functional currencies using current exchange rates in effect at the balance sheet date. Non-monetary assets and liabilities are recorded at historical exchange rates. Revenue and expense accounts are remeasured at the weighted-average exchange rate for the period. Resulting exchange gains and losses related to remeasurement are included in general and administrative expenses on the consolidated statement of operations.
Where a non-U.S. currency is the functional currency, translation from that functional currency to U.S. dollars is performed for balance sheet accounts using current exchange rates in effect at the balance sheet date and for revenue and expense accounts using a weighted-average exchange rate for the period. Resulting translation adjustments are reported as a component of accumulated other comprehensive income (loss).
Treasury stock - The Company records the repurchase of shares of its common stock at cost on the trade date of the transaction. These shares are considered treasury stock, which is a reduction to stockholders’ equity. Treasury stock is included in authorized and issued shares but excluded from outstanding shares.
Share-based payments - The Company measures share-based compensation expense at the grant date, based on the estimated fair value of the award and uses the straight-line method of attribution, net of estimated forfeitures, for expensing awards over the requisite employee service period. The Company estimates the fair value of its non-qualified stock option awards (“Options”) using a Black-Scholes valuation model. The fair value of restricted stock units (“RSUs”) is determined and fixed on the grant date based on the Company’s stock price, adjusted for the exclusion of dividend equivalents. The Monte Carlo simulation valuation model is used to determine the grant date fair value of performance stock units (“PSUs”) granted. All share-based compensation expenses are recorded in general and administrative expenses on the consolidated statement of operations.
Redeemable non-controlling interests - The Company’s business combinations may include provisions allowing non-controlling equity owners the ability to require the Company to purchase additional interests in the subsidiary at their discretion. These interests are initially recorded at fair value and in subsequent reporting periods are accreted or adjusted to their estimated redemption value. These adjustments to the redemption value will impact retained earnings or additional paid-in capital on the consolidated balance sheet, but will not impact the consolidated statement of operations. The redeemable non-controlling interests are considered temporary and reported outside of permanent equity on the consolidated balance sheet at the greater of the carrying amount adjusted for the non-controlling interest’s share of net income (loss) or its redemption value.
Earnings per share - The Company calculates basic earnings per share (“EPS”) by dividing net income by the weighted-average number of common shares outstanding during the year. Diluted EPS is calculated by dividing net income by the weighted-average number of common shares outstanding during the year, adjusted for the potentially dilutive effect of stock options and unvested stock units using the treasury stock method. The Company may be required to calculate EPS using the two-class method as a result of its redeemable non-controlling interests. If redemption value exceeds the fair value of the redeemable non-controlling interests, the excess would be a reduction to net income for the EPS calculation. For 2018, 2017 and 2016, there was no impact to EPS for adjustments related to redeemable non-controlling interests.
Recently adopted accounting pronouncements
Disclosure requirements for defined benefit plans - In August 2018, the Financial Accounting Standards Board (the “FASB”) issued accounting guidance which modifies disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans by removing, modifying and adding certain disclosures. This guidance is required to be applied retrospectively and is effective for periods ending after December 15, 2020, with early adoption permitted. The Company adopted this guidance effective December 31, 2018, which did not result in a material impact on the Company’s current year consolidated financial statements.
Income taxes - In March 2018, the FASB incorporated the Securities and Exchange Commission’s (the “SEC’s”) interpretive guidance from Staff Accounting Bulletin No. 118 (“SAB 118”), issued on December 22, 2017, into the income tax accounting codification under GAAP. The guidance allows for the recognition of provisional amounts related to 2017 U.S. tax reform (“U.S. Tax Reform”) during a one year measurement period with changes recorded as a component of income tax expense. This guidance was effective upon issuance. Refer to Note 19 (Income Taxes) for further discussion.
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 on 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, which did not result in a 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 to the prior year consolidated financial statements. Refer to Note 13 (Pension, Postretirement and Savings Plans) for the components of the Company’s net periodic pension cost and net periodic postretirement benefit costs.
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, with early adoption permitted. 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 of restricted cash for litigation settlement, restricted security deposits held for customers and other restricted cash balances in its reconciliation of beginning-of-period and end-of-period amounts shown on the consolidated statement of cash flows. Refer to Note 5 (Cash, Cash Equivalents, Restricted Cash and Restricted Cash Equivalents) for related disclosures.
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 are 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. Refer to Note 19 (Income Taxes) for further discussion. 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.
Financial instruments - In January 2016, the FASB issued accounting guidance to amend certain aspects of recognition, measurement, presentation and disclosure of financial instruments, including the requirement to measure certain equity investments at fair value with changes in fair value recognized in income. This guidance is required to be applied by means of a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption. Amendments related to equity securities without readily determinable fair values should be applied prospectively to equity investments that exist as of the date of adoption. The guidance is effective for periods beginning after December 15, 2017. The Company adopted this guidance effective January 1, 2018. The cumulative effect of the adoption of the standard was de minimis to the Company’s balance sheet upon adoption. For the year ended December 31, 2018, the Company recorded a gain on non-marketable equity investments, which resulted in a pre-tax increase of $12 million.
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 impacts the timing of certain customer incentives recognized in the Company’s consolidated statement of operations, as they are recognized over the life of the contract. Previously, such incentives were recognized when earned by the customer. The new revenue guidance also impacts the Company’s 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 following tables summarize the impact of the revenue standard on the Company’s consolidated statement of operations for the year ended December 31, 2018 and consolidated balance sheet as of December 31, 2018:
 
Year Ended December 31, 2018
 
Balances excluding revenue standard
 
Impact of revenue standard
 
As reported
 
(in millions)
Net Revenue
$
14,471

 
$
479

 
$
14,950

 
 
 
 
 
 
Operating Expenses
 
 
 
 
 
Advertising and marketing
743

 
164

 
907

 
 
 
 
 
 
Income before income taxes
6,889

 
315

 
7,204

Income tax expense
1,278

 
67

 
1,345

Net Income
5,611

 
248

 
5,859

 
December 31, 2018
 
Balances excluding revenue standard
 
Impact of revenue standard
 
As reported
 
(in millions)
Assets
 
 
 
 
 
Accounts receivable
$
2,214

 
$
62

 
$
2,276

Prepaid expenses and other current assets
1,176

 
256

 
1,432

Deferred income taxes
666

 
(96
)
 
570

Other assets
2,388

 
915

 
3,303

 
 
 
 
 
 
Liabilities
 
 
 
 
 
Accounts payable
959

 
(422
)
 
537

Accrued expenses
4,375

 
372

 
4,747

Other current liabilities
1,085

 
(136
)
 
949

Other liabilities
1,145

 
732

 
1,877

 
 
 
 
 
 
Equity
 
 
 
 
 
Retained earnings
26,692

 
591

 
27,283

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


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

 
181

 
(17
)
 
1,204

Deferred income taxes
250

 
(69
)
 
186

 
367

Other assets
2,298

 
690

 
(352
)
 
2,636

Liabilities
 
 
 
 
 
 
 
Accounts payable
933

 
(495
)
 

 
438

Accrued expenses
3,931

 
391

 

 
4,322

Other current liabilities
792

 
(44
)
 

 
748

Other liabilities
1,438

 
628

 

 
2,066

Equity
 
 
 
 
 
 
 
Retained earnings
22,364

 
366

 
(183
)
 
22,547


Recent accounting pronouncements not yet adopted

Implementation costs incurred in a hosting arrangement that is a service contract - In August 2018, the FASB issued accounting guidance which aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. This guidance is effective for periods beginning after December 15, 2019 and early adoption is permitted. Companies are required to adopt this guidance either retrospectively or by prospectively applying the guidance to all implementation costs incurred after the date of adoption. The Company is in the process of evaluating when it will adopt this guidance and the potential effects this guidance will have on its consolidated financial statements.

Disclosure requirements for fair value measurement - In August 2018, the FASB issued accounting guidance which modifies disclosure requirements for fair value measurements by removing, modifying and adding certain disclosures. This guidance is effective for periods beginning after December 15, 2019. Companies are permitted to early adopt the removed or modified disclosures and delay adoption of added disclosures until the effective date. Companies are required to adopt the guidance for certain added disclosures prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption and all other amendments retrospectively to all periods presented upon their effective date. The Company is in the process of evaluating when it will adopt this guidance and the potential effects this guidance will have on its disclosures.

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 U.S. Tax Reform. The guidance is effective for periods beginning after December 15, 2018, with early adoption permitted. The Company will adopt this guidance effective January 1, 2019 and does not expect the impacts of this standard 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 hedge nonfinancial and financial risk components, 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. The Company will adopt this guidance effective January 1, 2019 and does not expect the impacts of this standard to be material. For a more detailed discussion of the Company’s foreign exchange risk management activities, refer to Note 22 (Foreign Exchange Risk Management).
Credit losses - In June 2016, the FASB issued accounting guidance to amend the measurement of credit losses for financial instruments. The guidance requires all expected credit losses for most financial assets held at the reporting date to be measured based on historical experience, current conditions, and reasonable and supportable forecasts, generally resulting in the earlier recognition of allowance for losses. The guidance is effective for periods beginning after December 15, 2019, with early adoption permitted. The Company is required to apply the provisions of this guidance as a cumulative effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is adopted. The Company will adopt this guidance effective January 1, 2020 and does not expect the impacts of this standard to be material.
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 beginning after December 15, 2018. The Company will adopt this guidance effective January 1, 2019 using the modified retrospective approach as of the date of adoption with the available practical expedients. Upon adoption of the standard, the estimated impact on the Company’s consolidated financial statements is expected to be an increase in non-current assets with a corresponding increase in current and non-current liabilities. The Company estimates that the increase in assets and liabilities will represent approximately 2% of the Company’s total assets and total liabilities as of December 31, 2018 and expects no significant impact to retained earnings.
v3.10.0.1
Acquisitions Business Combination (Notes)
12 Months Ended
Dec. 31, 2018
Business Combinations [Abstract]  
Business Combination Disclosure
Acquisitions
In 2017, the Company acquired businesses for total consideration of $1.5 billion, representing both cash and contingent consideration. For the businesses acquired, Mastercard allocated the values associated with the assets, liabilities and redeemable non-controlling interests based on their respective fair values on the acquisition dates. Refer to Note 1 (Summary of Significant Accounting Policies), for the valuation techniques Mastercard utilizes to fair value the assets and liabilities acquired in business combinations. The residual value allocated to goodwill is not expected to be deductible for local tax purposes.
The Company has finalized the purchase accounting for businesses acquired during 2017. The final fair values of the purchase price allocations, as of the acquisition dates, are noted below:
 
(in millions)
Cash consideration
$
1,286

Contingent consideration
202

Redeemable non-controlling interests
69

Gain on previously held minority interest
14

Total fair value of businesses acquired
$
1,571

 
 
Assets:
 
Cash and cash equivalents
$
111

Other current assets
110

Other intangible assets
488

Goodwill
1,135

Other assets
91

Total assets
1,935

 
 
Liabilities:
 
Short-term debt1
64

Other current liabilities
170

Net pension liability
66

Other liabilities
64

Total liabilities
364

 
 
Net assets acquired
$
1,571


1 The short-term debt assumed through acquisitions was repaid during 2017.
The following table summarizes the identified intangible assets acquired:
 
Acquisition Date
Fair Value
 
Weighted-Average Useful Life
 
(in millions)
 
(Years)
Developed technologies
$
319

 
7.5
Customer relationships
166

 
9.9
Other
3

 
1.4
Other intangible assets
$
488

 
8.3

For the businesses acquired in 2017, the largest acquisition relates to Vocalink, a payment systems and ATM switching platform operator, located principally in the U.K. On April 28, 2017, Mastercard acquired 92.4% controlling interest in Vocalink for cash consideration of £719 million ($929 million as of the acquisition date). In addition, the Vocalink sellers have the potential to earn additional contingent consideration of £169 million (approximately $214 million as of December 31, 2018), upon meeting 2018 revenue targets in accordance with terms of the purchase agreement. Refer to Note 7 (Fair Value and Investment Securities) for additional information related to the fair value of contingent consideration.
A majority of Vocalink’s shareholders have retained a 7.6% ownership for at least three years, which is recorded as redeemable non-controlling interests on the consolidated balance sheet. These remaining shareholders have a put option to sell their ownership interest to Mastercard on the third and fifth anniversaries of the transaction and quarterly thereafter (the “Third Anniversary Option” and “Fifth Anniversary Option”, respectively).  The Third Anniversary Option is exercisable at a fixed price of £58 million (approximately $73 million as of December 31, 2018) (“Fixed Price”). The Fifth Anniversary Option is exercisable at the greater of the Fixed Price or fair value. Additionally, Mastercard has a call option to purchase the remaining interest from Vocalink’s shareholders on the fifth anniversary of the transaction and quarterly thereafter, which is exercisable at the greater of the Fixed Price or fair value. The fair value of the redeemable non-controlling interests was determined utilizing a market approach, which extrapolated the consideration transferred that was discounted for lack of control and marketability.
The consolidated financial statements include the operating results of the acquired businesses from the dates of their respective acquisition. Pro forma information related to the acquisitions was not included because the impact on the Company’s consolidated results of operations was not considered to be material.
v3.10.0.1
Revenue (Notes)
12 Months Ended
Dec. 31, 2018
Revenue from Contract with Customer [Abstract]  
Revenue
Revenue
Mastercard’s business model involves four participants in addition to the Company: account holders, issuers (the account holders’ financial institutions), merchants 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
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 is 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 brands.
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 is 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 brands.
Transaction processing revenue is recognized for both domestic and cross-border transactions in the period in which the related transactions occur. 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.
Other revenues consist of value added service offerings that are typically sold with the Company’s payment service offerings and are recognized in the period in which the related services are performed or transactions occur. Other revenues include the following:
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 primarily 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 ACH transactions and other ACH related services.
Other payment-related products and services, including account and transaction enhancement services, rules compliance and publications.
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 primarily when volume- and transaction-based revenues are recognized 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 net revenue by source and geographic region for the year ended December 31, 2018:
 
(in millions)
 
 
Revenue by source:
 
Domestic assessments
$
6,138

Cross-border volume fees
4,954

Transaction processing
7,391

Other revenues
3,348

Gross revenue
21,831

Rebates and incentives (contra-revenue)
(6,881
)
Net revenue
$
14,950

 
 
Net revenue by geographic region:
 
North American Markets
$
5,311

International Markets
9,441

Other 1
198

Net revenue
$
14,950

1 Includes revenues managed by corporate functions.
Receivables from contracts with customers of $2.1 billion and $1.9 billion as of December 31, 2018 and 2017, respectively, are recorded within accounts receivable on the consolidated balance sheet. The Company’s customers are billed quarterly or more frequently dependent upon the nature of the performance obligation and the underlying contractual terms. The Company does not offer extended payment terms to customers.
Contract assets are included in prepaid expenses and other current assets and other assets on the consolidated balance sheet at December 31, 2018 in the amounts of $40 million and $92 million, respectively. The Company did not have contract assets at December 31, 2017.
Deferred revenue is included in other current liabilities and other liabilities on the consolidated balance sheet at December 31, 2018 in the amounts of $218 million and $101 million, respectively. The comparable amounts included in other current liabilities and other liabilities at December 31, 2017 were $230 million and $17 million, respectively. Revenue recognized from such performance obligations satisfied during 2018 was $904 million.
The Company’s remaining performance periods for its contracts with customers for its payment network services are typically long-term in nature (generally up to 10 years). As a payment network service provider, the Company provides its customers with continuous access to its global payment processing 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 Company also earns revenues from other value added services comprised of bank account-based payment services, consulting and research fees, loyalty programs and other payment-related products and services. At December 31, 2018, the estimated aggregate consideration allocated to unsatisfied performance obligations for these other value added services is $1.0 billion, which is expected to be recognized through 2022. The estimated remaining performance obligations related to these revenues are subject to change and are affected by several factors, including modifications and terminations and are not expected to be material to any future annual period.
v3.10.0.1
Earnings Per Share
12 Months Ended
Dec. 31, 2018
Earnings Per Share [Abstract]  
Earnings Per Share
Earnings Per Share
The components of basic and diluted EPS for common shares for each of the years ended December 31 were as follows:
 
2018
 
2017
 
2016
 
(in millions, except per share data)
Numerator
 
 
 
 
 
Net income
$
5,859

 
$
3,915

 
$
4,059

Denominator
 
 
 
 
 
Basic weighted-average shares outstanding
1,041

 
1,067

 
1,098

Dilutive stock options and stock units
6

 
5

 
3

Diluted weighted-average shares outstanding 1
1,047

 
1,072

 
1,101

Earnings per Share
 
 
 
 
 
Basic
$
5.63

 
$
3.67

 
$
3.70

Diluted
$
5.60

 
$
3.65

 
$
3.69


Note: Table may not sum due to rounding.
1 For the years presented, the calculation of diluted EPS excluded a minimal amount of anti-dilutive share-based payment awards.
v3.10.0.1
Cash, Cash Equivalents, Restricted Cash and Restricted Cash Equivalents (Notes)
12 Months Ended
Dec. 31, 2018
Cash, Cash Equivalents, Restricted Cash and Restricted Cash Equivalents [Abstract]  
Cash, Cash Equivalents, Restricted Cash and Restricted Cash Equivalents
Cash, Cash Equivalents, Restricted Cash and Restricted Cash Equivalents
The following table provides a reconciliation of cash, cash equivalents, restricted cash and restricted cash equivalents reported on the consolidated balance sheet that total to the amounts shown on the consolidated statement of cash flows.
 
December 31,
 
2018
 
2017
 
2016
 
2015
 
(in millions)
Cash and cash equivalents
$
6,682

 
$
5,933

 
$
6,721

 
$
5,747

Restricted cash and restricted cash equivalents
 
 
 
 
 
 
 
Restricted cash for litigation settlement
553

 
546

 
543

 
541

Restricted security deposits held for customers
1,080

 
1,085

 
991

 
895

Prepaid expenses and other current assets
22

 
28

 
3

 

Other assets

 

 
15

 
10

Cash, cash equivalents, restricted cash and restricted cash equivalents
$
8,337

 
$
7,592

 
$
8,273

 
$
7,193

 
 
 
 
 
 
 
 
v3.10.0.1
Supplemental Cash Flows
12 Months Ended
Dec. 31, 2018
Supplemental Cash Flow Information [Abstract]  
Supplemental Cash Flows
Supplemental Cash Flows
The following table includes supplemental cash flow disclosures for each of the years ended December 31:
 
2018
 
2017
 
2016
 
(in millions)
Cash paid for income taxes, net of refunds
$
1,790

 
$
1,893

 
$
1,579

Cash paid for interest
153

 
135

 
74

Cash paid for legal settlements
260

 
47

 
101

Non-cash investing and financing activities
 
 
 
 
 
Dividends declared but not yet paid
340

 
263

 
238

Capital leases and other
10

 
30

 
3

Fair value of assets acquired, net of cash acquired

 
1,825

 

Fair value of liabilities assumed related to acquisitions

 
365

 

v3.10.0.1
Fair Value and Investment Securities
12 Months Ended
Dec. 31, 2018
Financial Instruments, Financial Liabilities, Balance Sheet Groupings [Abstract]  
Fair Value and Investment Securities
Fair Value and Investment Securities
Financial Instruments - Recurring Measurements
The Company classifies its fair value measurements of financial instruments within the Valuation Hierarchy. There were no transfers made among the three levels in the Valuation Hierarchy for 2018.
The distribution of the Company’s financial instruments measured at fair value on a recurring basis within the Valuation Hierarchy were as follows:
 
December 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
$

 
$
15

 
$

 
$
15

 
$

 
$
17

 
$

 
$
17

Government and agency securities
65

 
92

 

 
157

 
81

 
104

 

 
185

Corporate securities

 
1,043

 

 
1,043

 

 
876

 

 
876

Asset-backed securities

 
217

 

 
217

 

 
70

 

 
70

Equity securities

 

 

 

 
1

 

 

 
1

Derivative instruments 2:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Foreign currency derivative assets

 
35

 

 
35

 

 
6

 

 
6

Deferred compensation plan 3:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Deferred compensation assets
54

 

 

 
54

 
55

 

 

 
55

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Derivative instruments 2:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Foreign currency derivative liabilities
$

 
$
(6
)
 
$

 
$
(6
)
 
$

 
$
(30
)
 
$

 
$
(30
)
Deferred compensation plan 4:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Deferred compensation liabilities
(54
)
 

 

 
(54
)
 
(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 22 (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 identical instruments to the investment vehicles selected by the participants. These 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 December 31, 2018 and 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. See Note 21 (Settlement and Other Risk Management) for additional information regarding the Company’s settlement and other guarantee liabilities.
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 December 31, 2018 and 2017, the Company held $264 million and $700 million, respectively, of held-to-maturity securities due within one year. 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. In addition, nonmarketable equity investments accounted for under the cost method of accounting are adjusted for changes resulting from identifiable 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. See Note 8 (Prepaid Expenses and Other Assets) for further details.
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 as Level 2 of the Valuation Hierarchy. At December 31, 2018, the carrying value and fair value of total long-term debt (including the current portion) was $6.3 billion and $6.5 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.
Contingent Consideration
The contingent consideration attributable to acquisitions made in 2017 is primarily based on the achievement of 2018 revenue targets and is measured at fair value on a recurring basis. This contingent consideration liability is included in other current liabilities on the consolidated balance sheet and 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 2018 was as follows:
 
(in millions)
Balance at December 31, 2017
$
219

Net change in valuation
19

Payments
(5
)
Foreign currency translation
(14
)
Balance at December 31, 2018
$
219



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 December 31, 2018 and 2017 were as follows:
 
December 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
$
15

 
$

 
$

 
$
15

 
$
17

 
$

 
$

 
$
17

Government and agency securities
157

 

 

 
157

 
185

 

 

 
185

Corporate securities
1,044

 
1

 
(2
)
 
1,043

 
875

 
2

 
(1
)
 
876

Asset-backed securities
217

 

 

 
217

 
70

 

 

 
70

Equity securities

 

 

 

 

 
1

 

 
1

Total
$
1,433

 
$
1

 
$
(2
)
 
$
1,432

 
$
1,147

 
$
3

 
$
(1
)
 
$
1,149


The Company’s available-for-sale investment securities held at December 31, 2018 and 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 December 31, 2018 was as follows:
 
Available-For-Sale
 
Amortized
Cost
 
Fair Value
 
(in millions)
Due within 1 year
$
376

 
$
376

Due after 1 year through 5 years
1,056

 
1,055

Due after 5 years through 10 years
1

 
1

Total
$
1,433

 
$
1,432


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 2018, 2017 and 2016 were not significant.
v3.10.0.1
Prepaid Expenses and Other Assets
12 Months Ended
Dec. 31, 2018
Prepaid Expense and Other Assets [Abstract]  
Prepaid Expenses and Other Assets
Prepaid Expenses and Other Assets
Prepaid expenses and other current assets consisted of the following at December 31:
 
2018
 
2017
 
(in millions)
Customer and merchant incentives
$
778

 
$
464

Prepaid income taxes
51

 
77

Other
603

 
499

Total prepaid expenses and other current assets
$
1,432

 
$
1,040


Other assets consisted of the following at December 31:
 
2018
 
2017
 
(in millions)
Customer and merchant incentives
$
2,458

 
$
1,434

Nonmarketable equity investments
337

 
249

Prepaid income taxes

 
352

Income taxes receivable
298

 
178

Other
210

 
85

Total other assets
$
3,303

 
$
2,298


Customer and merchant incentives represent payments made 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. The increase in customer and merchant incentives and the decrease in prepaid income taxes at December 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.
v3.10.0.1
Property, Plant and Equipment
12 Months Ended
Dec. 31, 2018
Property, Plant and Equipment [Abstract]  
Property, Plant and Equipment
Property, Plant and Equipment
Property, plant and equipment consisted of the following at December 31:
 
2018
 
2017
 
(in millions)
Building, building equipment and land
$
481

 
$
455

Equipment
987

 
841

Furniture and fixtures
85

 
81

Leasehold improvements
215

 
166

Property, plant and equipment
1,768

 
1,543

Less: accumulated depreciation and amortization
(847
)
 
(714
)
Property, plant and equipment, net
$
921

 
$
829


As of December 31, 2018 and 2017, capital leases of $33 million and $32 million, respectively, were included in equipment. Accumulated amortization of these capital leases was $24 million and $18 million as of December 31, 2018 and 2017, respectively.
Depreciation and amortization expense for the above property, plant and equipment was $209 million, $185 million and $151 million for 2018, 2017 and 2016, respectively.
v3.10.0.1
Goodwill
12 Months Ended
Dec. 31, 2018
Goodwill and Intangible Assets Disclosure [Abstract]  
Goodwill
Goodwill
The changes in the carrying amount of goodwill for the years ended December 31, 2018 and 2017 were as follows:
 
2018
 
2017
 
(in millions)
Beginning balance
$
3,035

 
$
1,756

Additions
2

 
1,136

Foreign currency translation
(133
)
 
143

Ending balance
$
2,904

 
$
3,035


The Company had no accumulated impairment losses for goodwill at December 31, 2018. Based on annual impairment testing, the Company’s goodwill is not impaired.
v3.10.0.1
Other Intangible Assets
12 Months Ended
Dec. 31, 2018
Intangible Assets, Net (Excluding Goodwill) [Abstract]  
Other Intangible Assets
Other Intangible Assets
The following table sets forth net intangible assets, other than goodwill, at December 31:
 
2018
 
2017
 
Gross Carrying Amount
 
Accumulated Amortization
 
Net Carrying Amount
 
Gross Carrying Amount
 
Accumulated Amortization
 
Net Carrying Amount
 
(in millions)
Finite-lived intangible assets
 
 
 
 
 
 
 
 
 
 
 
     Capitalized software
$
1,514

 
$
(898
)
 
$
616

 
$
1,572

 
$
(888
)
 
$
684

     Customer relationships
439

 
(232
)
 
207

 
473

 
(214
)
 
259

     Other