MASTERCARD INC, 10-K filed on 2/14/2018
Annual Report
Document and Entity Information (USD $)
In Billions, except Share data, unless otherwise specified
12 Months Ended
Dec. 31, 2017
Jun. 30, 2017
Feb. 9, 2018
Class A Common Stock
Feb. 9, 2018
Class B Common Stock
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, 2017 
 
 
 
Document Fiscal Year Focus
2017 
 
 
 
Document Fiscal Period Focus
Q4 
 
 
 
Amendment Flag
false 
 
 
 
Entity Common Stock, Shares Outstanding
 
 
1,037,246,307 
14,138,629 
Entity Well-known Seasoned Issuer
Yes 
 
 
 
Entity Voluntary Filers
No 
 
 
 
Entity Current Reporting Status
Yes 
 
 
 
Entity Public Float
 
$ 113.8 
 
 
Consolidated Balance Sheet (USD $)
In Millions, unless otherwise specified
Dec. 31, 2017
Dec. 31, 2016
ASSETS
 
 
Cash and cash equivalents
$ 5,933 
$ 6,721 
Restricted cash for litigation settlement
546 
543 
Investments
1,849 
1,614 
Accounts receivable
1,969 
1,416 
Settlement due from customers
1,375 
1,093 
Restricted security deposits held for customers
1,085 
991 
Prepaid expenses and other current assets
1,040 
850 
Total Current Assets
13,797 
13,228 
Property, plant and equipment, net
829 
733 
Deferred income taxes
250 
307 
Goodwill
3,035 
1,756 
Other intangible assets, net
1,120 
722 
Other assets
2,298 
1,929 
Total Assets
21,329 
18,675 
LIABILITIES, REDEEMABLE NON-CONTROLLING INTERESTS AND EQUITY
 
 
Accounts payable
933 
609 
Settlement due to customers
1,343 
946 
Restricted security deposits held for customers
1,085 
991 
Accrued litigation
709 
722 
Accrued expenses
3,931 
3,318 
Other current liabilities
792 
620 
Total Current Liabilities
8,793 
7,206 
Long-term debt
5,424 
5,180 
Deferred income taxes
106 
81 
Other liabilities
1,438 
524 
Total Liabilities
15,761 
12,991 
Commitments and Contingencies
   
   
Redeemable non-controlling interests
71 
Stockholders’ Equity
 
 
Additional paid-in-capital
4,365 
4,183 
Class A treasury stock, at cost, 342 and 312 shares, respectively
(20,764)
(17,021)
Retained earnings
22,364 
19,418 
Accumulated other comprehensive income (loss)
(497)
(924)
Total Stockholders’ Equity
5,468 
5,656 
Non-controlling interests
29 
28 
Total Equity
5,497 
5,684 
Total Liabilities, Redeemable Non-controlling Interests and Equity
21,329 
18,675 
Class A Common Stock
 
 
Stockholders’ Equity
 
 
Common stock value
Total Equity
Class B Common Stock
 
 
Stockholders’ Equity
 
 
Common stock value
Total Equity
$ 0 
$ 0 
Consolidated Balance Sheet (Parenthetical) (USD $)
Dec. 31, 2017
Dec. 31, 2016
Class A treasury stock, shares
342,000,000 
312,000,000 
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
1,382,000,000 
1,374,000,000 
Common stock, outstanding
1,040,000,000 
1,062,000,000 
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
14,000,000 
19,000,000 
Common stock, outstanding
14,000,000 
19,000,000 
Consolidated Statement of Operations (USD $)
In Millions, except Per Share data, unless otherwise specified
12 Months Ended
Dec. 31, 2017
Dec. 31, 2016
Dec. 31, 2015
Income Statement [Abstract]
 
 
 
Net Revenue
$ 12,497 
$ 10,776 
$ 9,667 
Operating Expenses
 
 
 
General and administrative
4,526 
3,714 
3,341 
Advertising and marketing
898 
811 
821 
Depreciation and amortization
436 
373 
366 
Provision for litigation settlements
15 
117 
61 
Total operating expenses
5,875 
5,015 
4,589 
Operating income
6,622 
5,761 
5,078 
Other Income (Expense)
 
 
 
Investment income
56 
43 
25 
Interest expense
(154)
(95)
(61)
Other income (expense), net
(2)
(63)
(84)
Total other income (expense)
(100)
(115)
(120)
Income before income taxes
6,522 
5,646 
4,958 
Income tax expense
2,607 
1,587 
1,150 
Net Income
$ 3,915 
$ 4,059 
$ 3,808 
Basic Earnings per Share
$ 3.67 
$ 3.70 
$ 3.36 
Basic Weighted-Average Shares Outstanding
1,067 
1,098 
1,134 
Diluted Earnings per Share
$ 3.65 
$ 3.69 
$ 3.35 
Diluted Weighted-Average Shares Outstanding
1,072 
1,101 
1,137 
Consolidated Statement of Comprehensive Income (USD $)
In Millions, unless otherwise specified
12 Months Ended
Dec. 31, 2017
Dec. 31, 2016
Dec. 31, 2015
Statement of Comprehensive Income [Abstract]
 
 
 
Net Income
$ 3,915 
$ 4,059 
$ 3,808 
Other comprehensive income (loss):
 
 
 
Foreign currency translation adjustments
565 
(275)
(460)
Income tax effect
(11)
27 
Foreign currency translation adjustments, net of income tax effect
567 
(286)
(433)
Translation adjustments on net investment hedge
(236)
60 
(40)
Income tax effect
83 
(22)
14 
Translation adjustments on net investment hedge, net of income tax effect
(153)
38 
(26)
Defined benefit pension and other postretirement plans
17 
(1)
(19)
Income tax effect
(2)
Defined benefit pension and other postretirement plans, net of income tax effect
15 
(1)
(12)
Reclassification adjustment for defined benefit pension and other postretirement plans
(2)
(1)
80 
Income tax effect
(29)
Reclassification adjustment for defined benefit pension and other postretirement plans, net of income tax effect
(1)
(1)
51 
Investment securities available-for-sale
(3)
(11)
Income tax effect
(1)
Investment securities available-for-sale, net of income tax effect
(1)
(11)
Reclassification adjustment for investment securities available-for-sale
15 
Income tax effect
Reclassification adjustment for investment securities available-for-sale, net of income tax effect
15 
Other comprehensive income (loss), net of income tax effect
427 
(248)
(416)
Comprehensive Income
$ 4,342 
$ 3,811 
$ 3,392 
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, 2014
$ 6,824 
$ 13,169 
$ (260)
$ 3,876 
$ (9,995)
$ 34 
$ 0 
$ 0 
Net income
3,808 
3,808 
 
 
 
 
 
 
Activity related to non-controlling interests
 
 
 
 
 
 
Other comprehensive income (loss), net of tax
(416)
 
(416)
 
 
 
 
 
Cash dividends declared on Class A and Class B common stock ($0.67, $0.79 and $0.91 in 2015, 2016 and 2017, respectively)
(755)
(755)
 
 
 
 
 
 
Purchases of treasury stock
(3,532)
 
 
 
(3,532)
 
 
 
Shared-based payments
133 
 
 
128 
 
 
 
Conversion of Class B to Class A common stock
 
 
 
 
 
 
 
Balance at Dec. 31, 2015
6,062 
16,222 
(676)
4,004 
(13,522)
34 
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 ($0.67, $0.79 and $0.91 in 2015, 2016 and 2017, respectively)
(863)
(863)
 
 
 
 
 
 
Purchases of treasury stock
(3,503)
 
 
 
(3,503)
 
 
 
Shared-based payments
183 
 
 
179 
 
 
 
Conversion of Class B to Class A common stock
 
 
 
 
 
 
 
Balance at Dec. 31, 2016
5,684 
19,418 
(924)
4,183 
(17,021)
28 
Net income
3,915 
3,915 
 
 
 
 
 
 
Activity related to non-controlling interests
 
 
 
 
 
 
Other comprehensive income (loss), net of tax
427 
 
427 
 
 
 
 
 
Cash dividends declared on Class A and Class B common stock ($0.67, $0.79 and $0.91 in 2015, 2016 and 2017, respectively)
(969)
(969)
 
 
 
 
 
 
Purchases of treasury stock
(3,747)
 
 
(3,747)
 
 
 
Shared-based payments
186 
 
 
182 
 
 
 
Conversion of Class B to Class A common stock
 
 
 
 
 
 
 
Balance at Dec. 31, 2017
$ 5,497 
$ 22,364 
$ (497)
$ 4,365 
$ (20,764)
$ 29 
$ 0 
$ 0 
Consolidated Statement of Changes in Equity (Parenthetical)
12 Months Ended
Dec. 31, 2017
Dec. 31, 2016
Dec. 31, 2015
Statement of Stockholders' Equity [Abstract]
 
 
 
Cash dividends declared on Class A and Class B common stock, per share
$ 0.91 
$ 0.79 
$ 0.67 
Consolidated Statement of Cash Flows (USD $)
In Millions, unless otherwise specified
12 Months Ended
Dec. 31, 2017
Dec. 31, 2016
Dec. 31, 2015
Operating Activities
 
 
 
Net income
$ 3,915 
$ 4,059 
$ 3,808 
Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Amortization of customer and merchant incentives
1,001 
860 
764 
Depreciation and amortization
437 
373 
366 
Share-based compensation
176 
149 
122 
Tax benefit for share-based payments
(48)
(42)
Deferred income taxes
86 
(20)
(16)
Venezuela charge
167 
Other
59 
29 
(81)
Changes in operating assets and liabilities:
 
 
 
Accounts receivable
(445)
(338)
(35)
Settlement due from customers
(281)
(10)
(98)
Prepaid expenses
(1,402)
(1,073)
(802)
Accrued litigation and legal settlements
(15)
17 
(63)
Accounts payable
290 
145 
49 
Settlement due to customers
394 
66 
(186)
Accrued expenses
589 
520 
325 
Long-term taxes payable
577 
Net change in other assets and liabilities
(194)
(10)
Net cash provided by operating activities
5,555 
4,535 
4,101 
Investing Activities
 
 
 
Purchases of investment securities available-for-sale
(714)
(957)
(974)
Purchases of investments held-to-maturity
(1,145)
(867)
(918)
Proceeds from sales of investment securities available-for-sale
304 
277 
703 
Proceeds from maturities of investment securities available-for-sale
500 
339 
542 
Proceeds from maturities of investments held-to-maturity
1,020 
456 
857 
Purchases of property, plant and equipment
(300)
(215)
(177)
Capitalized software
(123)
(167)
(165)
Acquisition of businesses, net of cash acquired
(1,175)
(584)
Investment in nonmarketable equity investments
(147)
(31)
Other investing activities
(2)
(1)
Net cash used in investing activities
(1,779)
(1,167)
(715)
Financing Activities
 
 
 
Purchases of treasury stock
(3,762)
(3,511)
(3,518)
Proceeds from debt
1,972 
1,735 
Payment of debt
(64)
Dividends paid
(942)
(837)
(727)
Tax benefit for share-based payments
48 
42 
Tax withholdings related to share-based payments
(47)
(51)
(58)
Cash proceeds from exercise of stock options
57 
37 
27 
Other financing activities
(6)
(2)
(17)
Net cash used in financing activities
(4,764)
(2,344)
(2,516)
Effect of exchange rate changes on cash and cash equivalents
200 
(50)
(260)
Net (decrease) increase in cash and cash equivalents
(788)
974 
610 
Cash and cash equivalents - beginning of period
6,721 
5,747 
5,137 
Cash and cash equivalents - end of period
$ 5,933 
$ 6,721 
$ 5,747 
Summary of Significant Accounting Policies
Organization, Consolidation and Presentation of Financial Statements Disclosure and 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 facilitates the switching (authorization, clearing and settlement) of payment transactions, and delivers related products and services. 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 recent acquisition of VocaLink Holdings Limited (“Vocalink”) has expanded the Company’s capability to process automated clearing house (“ACH”) transactions, among other things. As a multi-rail network, Mastercard now offers customers one partner to turn to for their payment needs for both domestic and cross-border transactions. The Company also provides value-added offerings such as safety and security products, information services and consulting, loyalty and reward programs and issuer and acquirer processing. The Company’s networks 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 (an individual who holds a card or uses another device enabled for payment), merchant, issuer (the account holders’ financial institution) 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.
Mastercard generates revenues from assessing its customers based on the gross dollar volume (“GDV”) of activity on the products that carry its brands, from the fees charged to customers for providing transaction processing and from other payment-related products and services.
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, 2017 and 2016, 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 2017 presentation. 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. Due to increasing foreign exchange regulations in Venezuela restricting access to U.S. dollars, an other-than-temporary lack of exchangeability between the Venezuelan bolivar and U.S. dollar has impacted the 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) included in general and administrative expenses in the consolidated statement of operations.
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 2017, 2016 and 2015, 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. Investments for which the equity method or cost method of accounting is used are 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 when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the price is fixed or determinable, and collectibility is reasonably assured. Revenue is generally derived from transactional information accumulated by Mastercard’s systems or reported by customers. The Company’s revenue is based on the volume of activity on cards that carry the Company’s brands, the number of transactions processed or the nature of other payment-related products and services.
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 as the related transactions occur. Other payment-related products and services are recognized as revenue in the same period as the related transactions occur or services are rendered.
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 either when the revenue is recognized by the Company or at the time the rebate or incentive is earned by the customer. 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 deferred and amortized over the life of the agreement on a straight-line basis.
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 and 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. Impairment charges, if any, are recorded in general and administrative expenses on the consolidated statement of operations.
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.
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 Mastercard, Cirrus and Maestro-branded transactions between its issuers and acquirers. 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. 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 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 in its consolidated statement of operations. The Company includes penalties related to income tax matters in the income tax provision.
On December 22, 2017, in the U.S., “An Act to provide for reconciliation pursuant to titles II and V of the concurrent resolution on the budget for fiscal year 2018”, a comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “TCJA”), was enacted into law. Prior to the enactment of the TCJA, the Company did not historically provide for U.S. federal income tax and foreign withholding taxes on undistributed earnings from non-U.S. subsidiaries as such earnings were intended to be reinvested indefinitely outside of the U.S. The foreign earnings that the Company had repatriated to the United States, for periods prior to the enactment of the TCJA, were limited to the amount of current year foreign earnings and not made out of historic undistributed accumulated earnings. As of December 31, 2017, the Company has changed its assertion regarding the indefinite reinvestment of foreign earnings outside the U.S. for certain foreign affiliates. As a result of the TCJA and a one-time deemed repatriation tax on untaxed accumulated foreign earnings, a provisional amount of U.S. federal and state and local income taxes have been provided on all undistributed foreign earnings. Future distributions from foreign affiliates from earnings which have not already been taxed in the U.S. will be eligible for a 100% dividends received deduction. Beginning in 2018, deferred taxes will be established on the estimated foreign exchange gains or losses for foreign earnings that are not considered permanently reinvested, which will be recognized through cumulative translation adjustments as incurred. The working capital requirements of foreign affiliates will determine the amount of cash to be remitted from respective jurisdictions.
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 the cash is unavailable for withdrawal or usage for general operations. Restrictions may include legally restricted deposits, contracts entered into with others, or the Company’s statements of intention with regard to particular deposits.
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 assets measured at fair value on a nonrecurring basis include property, plant and equipment, nonmarketable equity investments, goodwill and other intangible assets. These assets are subject to impairment evaluation and if impaired, would be adjusted to fair value.
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’s 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 and equity 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 and equity 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 and equity 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 and equity securities for other-than-temporary impairment on an ongoing basis. When there has been a decline in fair value of a debt or equity 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 3 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 records all derivatives 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. Changes in the fair value of derivative instruments are reported 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, 2017 and 2016.
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.
Restricted security deposits held for customers - Mastercard 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, Mastercard 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.
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 balance sheet.
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 or 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 benefit obligation at December 31, the measurement date. The fair value of plan assets represents the current market value of the pension assets. Overfunded plans are aggregated and recorded in long-term other assets, while underfunded plans are aggregated and recorded as accrued expenses and long-term other liabilities on the consolidated balance sheet.
Net periodic pension and postretirement benefit cost/(income) is recognized in general and administrative expenses on the consolidated statement of operations. These costs include service costs, 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).
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 - 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 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 2017, 2016 and 2015, there was no impact to EPS for adjustments related to redeemable non-controlling interests.
Recent accounting pronouncements
Derivatives and Hedging - In August 2017, the Financial Accounting Standards Board (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 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 20 (Foreign Exchange Risk Management).
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. This guidance is effective for periods beginning after December 15, 2017, and interim periods within those years, with early adoption permitted. The Company will adopt this guidance effective January 1, 2018. The Company does not expect the impacts of this standard to be material. Refer to Note 11 (Pension, Postretirement and Savings Plans) for the components of the Company’s net periodic pension cost and net periodic postretirement benefit costs.
Goodwill impairment - In January 2017, the FASB issued accounting guidance to simplify how companies are required to test goodwill for impairment. Under this guidance, step 2 of the goodwill impairment test has been eliminated. Step 2 of the goodwill impairment test required companies to determine the implied fair value of the reporting unit’s goodwill. Under this guidance, companies will perform their annual, or interim, goodwill impairment test by comparing the reporting unit’s carrying value, including goodwill, to its fair value. An impairment charge would be recorded if the reporting unit’s carrying value exceeds its fair value. This guidance is required to be applied prospectively and is effective for periods beginning after December 15, 2019, with early adoption permitted. The Company adopted this guidance effective January 1, 2017 and there was no impact from the adoption of the new accounting guidance on its 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 will be 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 will adopt this guidance effective January 1, 2018. Upon adoption of this standard, the Company will include 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 and early adoption is permitted. The Company will adopt this guidance effective January 1, 2018. The Company is in the process of evaluating the impacts this guidance will have on its consolidated financial statements. However, the Company expects that it will recognize a cumulative-effect adjustment to retained earnings upon adoption of the new guidance related to certain tax activity resulting from intra-entity asset transfers occurring before the date of adoption. For a more detailed discussion of an intra-entity transfer of intellectual property that occurred in 2014, refer to Note 17 (Income Taxes).
Share-based payments - In March 2016, the FASB issued accounting guidance related to share-based payments to employees. The Company adopted this guidance on January 1, 2017. The adoption had the following impacts on the consolidated financial statements:
The Company is required to recognize the excess tax benefits and deficiencies from share-based awards on the consolidated statement of operations in the period in which they occurred rather than in additional paid-in-capital on the consolidated balance sheet. For the year ended December 31, 2017, the Company recorded excess tax benefits of $49 million within income tax expense on the consolidated statement of operations. The Company is also required to revise its calculation of diluted weighted-average shares outstanding by excluding the tax effects from the assumed proceeds available to repurchase shares. For the year ended December 31, 2017, diluted weighted-average shares outstanding included an additional 1 million shares as a result of the change in this calculation. For the year ended December 31, 2017, the net impact of adoption resulted in an increase of $0.04 to diluted EPS. Lastly, the Company is required to change the classification of these tax effects on the consolidated statement of cash flows and classify them as an operating activity rather than as a financing activity. Each of these above items have been adopted prospectively.
Retrospectively, the Company is required to change its classification of cash paid for employees’ withholding tax related to equity awards as a financing activity rather than as an operating activity on the consolidated statement of cash flows. As a result of this change in classification, cash provided by operating activities and cash used in financing activities on the consolidated statement of cash flows increased by $51 million and $58 million for the years ended December 31, 2016 and 2015, respectively.
This guidance allows a company-wide accounting policy election either to continue estimating forfeitures each period or to account for forfeitures as they occur. The Company elected to continue its existing practice to estimate the number of awards that will be forfeited. There was no impact on its consolidated financial statements.
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. In August 2015, the FASB issued accounting guidance that delayed the effective date of this standard by one year, making this guidance effective for fiscal years beginning after December 15, 2017. The Company will adopt this guidance effective January 1, 2018 under the modified retrospective transition method by recognizing the cumulative effect of initially applying the new standard as an increase to the opening balance of retained earnings. The comparative information will not be restated and will be reported under the accounting standards in effect for those periods. This new revenue guidance will primarily impact the timing of certain incentives which will be recognized over the life of the contract versus as earned by the customer. In addition, the Company will account for certain market development fund contributions and expenditures on a gross basis, instead of net, resulting in an increase to both revenues and expenses. Upon adoption of the standard, the estimated impact 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 customer deals will be executed throughout 2018.
Acquisitions Business Combination (Notes)
Business Combination Disclosure [Text Block]
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.
For acquisitions occurring in 2017, the Company is evaluating and finalizing the purchase price accounting; however, the preliminary estimated fair values of the purchase price allocations in aggregate, 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
1,136

Other assets
91

Total assets
1,936

 
 
Liabilities:
 
Short-term debt1
64

Other current liabilities
170

Net pension liability
66

Other liabilities
65

Total liabilities
365

 
 
Net assets acquired
$
1,571


1 The short-term debt assumed through acquisitions was repaid during the second quarter of 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 up to £169 million (approximately $228 million as of December 31, 2017) if certain revenue targets are met in 2018. Refer to Note 5 (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 $78 million as of December 31, 2017) (“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 rollforward of redeemable non-controlling interests was not included as the activity was not considered to be material.
In 2015, the Company acquired two businesses for $609 million in cash. For these acquisitions, the Company recorded $481 million as goodwill representing the aggregate excess of the purchase consideration over the fair value of the net assets acquired. A portion of the goodwill related to the 2015 acquisitions is expected to be deductible for local tax purposes.
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.
Earnings Per Share
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:
 
2017
 
2016
 
2015
 
(in millions, except per share data)
Numerator
 
 
 
 
 
Net income
$
3,915

 
$
4,059

 
$
3,808

Denominator
 
 
 
 
 
Basic weighted-average shares outstanding
1,067

 
1,098

 
1,134

Dilutive stock options and stock units
5

 
3

 
3

Diluted weighted-average shares outstanding 1
1,072

 
1,101

 
1,137

Earnings per Share
 
 
 
 
 
Basic
$
3.67

 
$
3.70

 
$
3.36

Diluted
$
3.65

 
$
3.69

 
$
3.35


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.
Supplemental Cash Flows
Supplemental Cash Flows
Supplemental Cash Flows
The following table includes supplemental cash flow disclosures for each of the years ended December 31:
 
2017
 
2016
 
2015
 
(in millions)
Cash paid for income taxes, net of refunds
$
1,893

 
$
1,579

 
$
1,097

Cash paid for interest
135

 
74

 
44

Cash paid for legal settlements
47

 
101

 
124

Non-cash investing and financing activities
 
 
 
 
 
Dividends declared but not yet paid
263

 
238

 
212

Capital leases and other
30

 
3

 
10

Fair value of assets acquired, net of cash acquired
1,825

 

 
626

Fair value of liabilities assumed related to acquisitions
365

 

 
42

Fair Value and Investment Securities
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 2017.
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, 2017
 
December 31, 2016
 
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
$

 
$
17

 
$

 
$
17

 
$

 
$
59

 
$

 
$
59

Government and agency securities
81

 
104

 

 
185

 
49

 
117

 

 
166

Corporate securities

 
876

 

 
876

 

 
855

 

 
855

Asset-backed securities

 
70

 

 
70

 

 
80

 

 
80

Equity securities
1

 

 

 
1

 
2

 

 

 
2

Derivative instruments 2:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Foreign currency derivative assets

 
6

 

 
6

 

 
29

 

 
29

Deferred compensation plan 3:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Deferred compensation assets
55

 

 

 
55

 

 

 

 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Derivative instruments 2:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Foreign currency derivative liabilities
$

 
$
(30
)
 
$

 
$
(30
)
 
$

 
$
(13
)
 
$

 
$
(13
)
Deferred compensation plan 4:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Deferred compensation liabilities
(54
)
 

 

 
(54
)
 
(43
)
 

 

 
(43
)

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 20 (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. The Company had previously invested in corporate-owned life insurance contracts that were recorded at cash surrender value. The contracts were terminated during the third quarter of 2017.
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. 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 December 31, 2017 and 2016, 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 19 (Settlement and Other Risk Management).
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, 2017 and 2016, the Company held $700 million and $452 million, respectively, of short-term held-to-maturity securities. In addition, at December 31, 2016, the Company held $61 million of long-term held-to-maturity securities included in other assets on the consolidated balance sheet. The Company did not hold any long-term held-to-maturity securities at December 31, 2017. 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. These 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 6 (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 as Level 2 of the Valuation Hierarchy. At December 31, 2017, the carrying value and fair value of long-term debt was $5.4 billion and $5.7 billion, respectively. At December 31, 2016, the carrying value and fair value of long-term debt was $5.2 billion and $5.3 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. The activity of the Company’s contingent consideration liability for 2017 was as follows:
 
(in millions)
Balance at December 31, 2016
$

Preliminary estimated fair value as of acquisition date for businesses acquired
202

Net change in valuation
7

Foreign currency translation
10

Balance at December 31, 2017
$
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, 2017 and 2016 were as follows:
 
December 31, 2017
 
December 31, 2016
 
Amortized
Cost
 
Gross
Unrealized
Gain
 
Gross
Unrealized
Loss
 
Fair
Value
 
Amortized
Cost
 
Gross
Unrealized
Gain
 
Gross
Unrealized
Loss
 
Fair
Value
 
(in millions)
Municipal securities
$
17

 
$

 
$

 
$
17

 
$
59

 
$

 
$

 
$
59

Government and agency securities
185

 

 

 
185

 
165

 
1

 

 
166

Corporate securities
875

 
2

 
(1
)
 
876

 
853

 
3

 
(1
)
 
855

Asset-backed securities
70

 

 

 
70

 
80

 

 

 
80

Equity securities

 
1

 

 
1

 
2

 

 

 
2

Total
$
1,147

 
$
3

 
$
(1
)
 
$
1,149

 
$
1,159

 
$
4

 
$
(1
)
 
$
1,162


The Company’s available-for-sale investment securities held at December 31, 2017 and 2016, 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, 2017 was as follows:
 
Available-For-Sale
 
Amortized
Cost
 
Fair Value
 
(in millions)
Due within 1 year
$
314

 
$
314

Due after 1 year through 5 years
832

 
833

Due after 5 years through 10 years
1

 
1

Due after 10 years

 

No contractual maturity 1

 
1

Total
$
1,147

 
$
1,149

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 2017, 2016 and 2015 were not significant.
Prepaid Expenses and Other Assets
Prepaid Expenses and Other Assets
Prepaid Expenses and Other Assets
Prepaid expenses and other current assets consisted of the following at December 31:
 
2017
 
2016
 
(in millions)
Customer and merchant incentives
$
464

 
$
479

Prepaid income taxes
77

 
118

Other
499

 
253

Total prepaid expenses and other current assets
$
1,040

 
$
850


Other assets consisted of the following at December 31:
 
2017
 
2016
 
(in millions)
Customer and merchant incentives
$
1,434

 
$
1,134

Nonmarketable equity investments
249

 
132

Prepaid income taxes
352

 
325

Income taxes receivable
178

 
175

Other
85

 
163

Total other assets
$
2,298

 
$
1,929


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.
Nonmarketable equity investments represent the Company’s cost and equity method investments. For the year ended December 31, 2017, the Company invested $147 million in nonmarketable cost method equity investments.
Non-current prepaid income taxes, included in the other asset table above, primarily consists of taxes paid in 2014 relating to the deferred charge resulting from the reorganization of the Company’s legal entity and tax structure to better align with its business footprint of its non-U.S. operations. See Note 17 (Income Taxes) for further discussion of this deferred charge.
Property, Plant and Equipment
Property, Plant and Equipment
Property, Plant and Equipment
Property, plant and equipment consisted of the following at December 31:
 
2017
 
2016
 
(in millions)
Building, building equipment and land
$
455

 
$
534

Equipment
841

 
606

Furniture and fixtures
81

 
63

Leasehold improvements
166

 
133

Property, plant and equipment
1,543

 
1,336

Less: accumulated depreciation and amortization
(714
)
 
(603
)
Property, plant and equipment, net
$
829

 
$
733


As of December 31, 2017 and 2016, capital leases of $32 million and $23 million, respectively, were included in equipment. Accumulated amortization of these capital leases was $18 million and $16 million as of December 31, 2017 and 2016, respectively.
Depreciation and amortization expense for the above property, plant and equipment was $185 million, $151 million and $131 million for 2017, 2016 and 2015, respectively.
Goodwill
Goodwill
Goodwill
The changes in the carrying amount of goodwill for the years ended December 31, 2017 and 2016 were as follows:
 
2017
 
2016
 
(in millions)
Beginning balance
$
1,756

 
$
1,891

Additions
1,136

 
8

Foreign currency translation
143

 
(143
)
Ending balance
$
3,035

 
$
1,756


The Company had no accumulated impairment losses for goodwill at December 31, 2017. Based on annual impairment testing, the Company’s goodwill is not impaired.
Other Intangible Assets
Other Intangible Assets
Other Intangible Assets
The following table sets forth net intangible assets, other than goodwill, at December 31:
 
2017
 
2016
 
Gross Carrying Amount
 
Accumulated Amortization
 
Net Carrying Amount
 
Gross Carrying Amount
 
Accumulated Amortization
 
Net Carrying Amount
 
(in millions)
Amortized intangible assets
 
 
 
 
 
 
 
 
 
 
 
     Capitalized software
$
1,572

 
$
(888
)
 
$
684

 
$
1,210

 
$
(768
)
 
$
442

     Trademarks and tradenames
30

 
(29
)
 
1

 
26

 
(22
)
 
4

     Customer relationships
473

 
(214
)
 
259

 
283

 
(162
)
 
121

     Other
27

 
(26
)
 
1

 
23

 
(22
)
 
1

Total
2,102

 
(1,157
)
 
945

 
1,542

 
(974
)
 
568

Unamortized intangible assets
 
 
 
 
 
 
 
 
 
 
 
     Customer relationships
175

 

 
175

 
154

 

 
154

Total
$
2,277

 
$
(1,157
)
 
$
1,120

 
$
1,696

 
$
(974
)
 
$
722


The increase in the gross carrying amount of amortized intangible assets in 2017 was primarily related to the businesses acquired in 2017. See Note 2 (Acquisitions) for further details. Certain intangible assets, including amortizable and unamortizable customer relationships and trademarks and tradenames, are denominated in foreign currencies. As such, the change in intangible assets includes a component attributable to foreign currency translation. Based on the qualitative assessment performed in 2017, it was determined that the Company’s indefinite-lived intangible assets were not impaired.
Amortization on the assets above amounted to $252 million, $221 million and $235 million in 2017, 2016 and 2015, respectively. The following table sets forth the estimated future amortization expense on amortizable intangible assets on the consolidated balance sheet at December 31, 2017 for the years ending December 31:
 
(in millions)
2018
$
257

2019
214

2020
147

2021
82

2022 and thereafter
245

 
$
945

Accrued Expenses and Accrued Litigation
Accrued Expenses and Accrued Litigation
Accrued Expenses and Accrued Litigation
Accrued expenses consisted of the following at December 31:
 
2017
 
2016
 
(in millions)
Customer and merchant incentives
$
2,648

 
$
2,286

Personnel costs
613

 
496

Advertising
88

 
71

Income and other taxes
194

 
161

Other
388

 
304

Total accrued expenses
$
3,931

 
$
3,318


As of December 31, 2017 and 2016, the Company’s provision for litigation was $709 million and $722 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 18 (Legal and Regulatory Proceedings) for further discussion of the U.S. and Canadian merchant class litigations.
Pension, Postretirement and Savings Plans
Pension, Postretirement and Savings Plans
Pension, Postretirement and Savings Plans
The Company and certain of its subsidiaries maintain various pension, postretirement, savings and other postemployment benefit plans that cover substantially all employees worldwide.
Defined Contribution Plans
The Company sponsors defined contribution retirement plans. The primary plan is the Mastercard Savings Plan, a 401(k) plan for substantially all of the Company’s U.S. employees, which is subject to the provisions of the Employee Retirement Income Security Act of 1974 (“ERISA”), as amended. In addition, the Company has several defined contribution plans outside of the U.S. The Company’s total expense for its defined contribution plans was $84 million, $73 million and $61 million in 2017, 2016 and 2015, respectively.
Defined Benefit and Other Postretirement Plans
In 2015, the Company terminated its non-contributory, qualified, U.S. defined benefit pension plan (the “U.S. Employee Pension Plan”). Participants had the option to receive a lump sum distribution or to participate in an annuity with a third-party insurance company. As a result of this termination, the Company settled its obligation for $287 million, which resulted in a pension settlement charge of $79 million recorded in general and administrative expense during 2015.
The Company also sponsors pension and postretirement plans for non-U.S. employees (the “non-U.S. Plans”) that cover various benefits specific to their country of employment.
In April 2017, the Company acquired a majority interest in Vocalink. Vocalink has a defined benefit pension plan (the “Vocalink Plan”) which is closed to new entrants and future accruals as of July 21, 2013, however, plan participants’ obligations are adjusted for future salary changes. The Company has agreed to make contributions of £15 million (approximately $20 million as of December 31, 2017) annually until March 2020. See Note 2 (Acquisitions) for additional information on the Vocalink acquisition.
The term “Pension Plans” includes the non-U.S. Plans, the Vocalink Plan and the U.S. Employee Pension Plan.
The Company maintains a postretirement plan providing health coverage and life insurance benefits for substantially all of its U.S. employees hired before July 1, 2007 (the “Postretirement Plan”).
The Company uses a December 31 measurement date for the Pension Plans and its Postretirement Plan (collectively the “Plans”). The Company recognizes the funded status of its Plans, measured as the difference between the fair value of the plan assets and the projected benefit obligation, in the consolidated balance sheet. The following table sets forth the Plans’ funded status, key assumptions and amounts recognized in the Company’s consolidated balance sheet at December 31:
 
Pension Plans
 
Postretirement Plan
 
2017
 
2016
 
2017
 
2016
 
(in millions, except percentages)
Change in benefit obligation
 
 
 
 
 
 
 
Benefit obligation at beginning of year
$
46

 
$
36

 
$
59

 
$
59

Benefit obligation acquired during the year
410

 

 

 

Service cost
9

 
10

 
1

 
1

Interest cost
8

 
1

 
2

 
2

Actuarial (gain) loss
(44
)
 
2

 
3

 
1

Benefits paid
(12
)
 
(2
)
 
(4
)
 
(4
)
Transfers in
3

 
1

 

 

Foreign currency translation
48

 
(2
)
 

 

Benefit obligation at end of year
468

 
46

 
61

 
59

 
 
 
 
 
 
 
 
Change in plan assets
 
 
 
 
 
 
 
Fair value of plan assets at beginning of year
33

 
27

 

 

Fair value of plan assets acquired during the year
344

 

 

 

Actual gain (loss) on plan assets
(4
)
 
1

 

 

Employer contributions
23

 
7

 
4

 
4

Benefits paid
(12
)
 
(2
)
 
(4
)
 
(4
)
Transfers in
3

 
1

 

 

Foreign currency translation
40

 
(1
)
 

 

Fair value of plan assets at end of year
427

 
33

 

 

Funded status at end of year
$
(41
)
 
$
(13
)
 
$
(61
)
 
$
(59
)
 
 
 
 
 
 
 
 
Amounts recognized on the consolidated balance sheet consist of:
 
 
 
 
 
 
 
Other liabilities, short-term
$

 
$

 
$
(3
)
 
$
(3
)
Other liabilities, long-term
(41
)
 
(13
)
 
(58
)
 
(56
)
 
$
(41
)
 
$
(13
)
 
$
(61
)
 
$
(59
)
 
 
 
 
 
 
 
 
Accumulated other comprehensive income consists of:
 
 
 
 
 
 
 
Net actuarial (gain) loss
$
(22
)
 
$

 
$
(5
)
 
$
(10
)
Prior service credit

 

 
(8
)
 
(10
)
Balance at end of year
$
(22
)
 
$

 
$
(13
)
 
$
(20
)
 
 
 
 
 
 
 
 
Weighted-average assumptions used to determine end of year benefit obligations
 
 
 
 
 
 
 
Discount rate
 
 
 
 
 
 
 
Non-U.S. Plans
1.80
%
 
1.60
%
 
*

 
*

Vocalink Plan
2.80
%
 
*

 
*

 
*

Postretirement Plan
*

 
*

 
3.50
%
 
4.00
%
 
 
 
 
 
 
 
 
Rate of compensation increase
 
 
 
 
 
 
 
Non-U.S. Plans
2.60
%
 
2.59
%
 
*

 
*

Vocalink Plan
3.85
%
 
*

 
*

 
*

Postretirement Plan
*

 
*

 
3.00
%
 
3.00
%
* Not applicable
Each of the Pension Plans had benefit obligations in excess of plan assets at December 31, 2017 and 2016. Information on the Pension Plans were as follows:
 
 
2017
 
2016
 
 
(in millions)
Projected benefit obligation
 
$
468

 
$
46

Accumulated benefit obligation
 
428

 
46

Fair value of plan assets
 
427

 
33


Components of net periodic benefit cost recorded in general and administrative expenses were as follows for the Plans for each of the years ended December 31:
 
 
Pension Plans
 
Postretirement Plan
 
 
2017
 
2016
 
2015
 
2017
 
2016
 
2015
 
 
(in millions)
Service cost
 
$
9

 
$
10

 
$
9

 
$
1

 
$
1

 
$
1

Interest cost
 
8

 
1

 
1

 
2

 
2

 
3

Expected return on plan assets
 
(13
)
 
(1
)
 
(1
)
 

 

 

Curtailment gain
 

 

 
1

 

 

 

Amortization of actuarial loss
 

 

 

 

 

 

Amortization of prior service credit
 

 

 

 
(2
)
 
(1
)
 

Pension settlement charge
 

 

 
79

 

 

 

Net periodic benefit cost
 
$
4

 
$
10

 
$
89

 
$
1

 
$
2

 
$
4


Other changes in plan assets and benefit obligations recognized in other comprehensive income for the years ended December 31 were as follows:
 
 
Pension Plans
 
Postretirement Plan
 
 
2017
 
2016
 
2015
 
2017
 
2016
 
2015
 
 
(in millions)
Curtailment gain
 
$

 
$

 
$
(1
)
 
$

 
$

 
$

Current year actuarial (gain) loss
 
(22
)
 
1

 

 
5

 

 
8

Current year prior service credit
 

 

 

 

 

 
11

Amortization of prior service credit
 

 

 

 
2

 
1

 

Pension settlement charge
 

 

 
(79
)
 

 

 

Total recognized in other comprehensive income (loss)
 
$
(22
)
 
$
1

 
$
(80
)
 
$
7

 
$
1

 
$
19

Total recognized in net periodic benefit cost and other comprehensive income (loss)
 
$
(18
)
 
$
11

 
$
9

 
$
8

 
$
3

 
$
23


The estimated amounts that are expected to be amortized from accumulated other comprehensive income into net periodic benefit cost in 2018 are as follows:
 
 
Pension Plans
 
Postretirement Plan
 
 
(in millions)
Prior service credit
 
$

 
$
(1
)

Assumptions
Weighted-average assumptions used to determine net periodic benefit cost were as follows for the years ended December 31:
 
 
Pension Plans
 
Postretirement Plan
 
 
2017
 
2016
 
2015
 
2017
 
2016
 
2015
Discount rate
 
 
 
 
 
 
 
 
 
 
 
 
Non-U.S. Plans
 
1.60
%
 
1.85
%
 
2.00
%
 
*

 
*

 
*

Vocalink Plan
 
2.50
%
 
*

 
*

 
*

 
*

 
*

Postretirement Plan
 
*

 
*

 
*

 
4.00
%
 
4.25
%
 
4.00
%
Expected return on plan assets
 
 
 
 
 
 
 
 
 
 
 
 
Non-U.S. Plans
 
3.25
%
 
3.25
%
 
3.25
%
 
*

 
*

 
*

Vocalink Plan
 
4.75
%
 
*

 
*

 
*

 
*

 
*

Postretirement Plan
 
*

 
*

 
*

 
*

 
*

 
*

Rate of compensation increase
 
 
 
 
 
 
 
 
 
 
 
 
Non-U.S. Plans
 
2.59
%
 
2.64
%
 
2.92