Document

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
FORM 10-Q
 
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2018.
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from             to             .
Commission file number 001-36859
   
 
PayPal Holdings, Inc.
(Exact Name of Registrant as Specified in Its Charter)
 
 
Delaware
47-2989869
(State or Other Jurisdiction of
Incorporation or Organization)
(I.R.S. Employer
Identification No.)
2211 North First Street
San Jose, California
95131
(Address of Principal Executive Offices)
(Zip Code)
(408) 967-1000
(Registrant’s telephone number, including area code)
  
 
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  [x]    No  [ ]
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  [x]    No  [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
ý 
Accelerated filer
o
Non-accelerated filer
o  
Smaller reporting company
o
 
 
Emerging growth company
o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  [ ]    No  [x]
As of October 17, 2018, there were 1,178,359,088 shares of the registrant's common stock, $0.0001 par value, outstanding, which is the only class of common or voting stock of the registrant issued.
 

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PayPal Holdings, Inc.
TABLE OF CONTENTS

 
 
 
Page Number
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 



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Table of Contents

PART I: FINANCIAL INFORMATION

Item 1: Financial Statements

PayPal Holdings, Inc.
CONDENSED CONSOLIDATED BALANCE SHEET
 
September 30,
2018
 
December 31,
2017
 
(In millions, except par value)
 
(Unaudited)
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
8,147

 
$
2,883

Short-term investments
1,440

 
2,812

Accounts receivable, net
412

 
283

Loans and interest receivable, net of allowances of $150 and $129 as of September 30, 2018 and December 31, 2017, respectively
2,112

 
1,314

Loans and interest receivable, held for sale
—

 
6,398

Funds receivable and customer accounts
20,951

 
18,242

Prepaid expenses and other current assets
928

 
713

Total current assets
33,990

 
32,645

Long-term investments
946

 
1,961

Property and equipment, net
1,646

 
1,528

Goodwill
6,054

 
4,339

Intangible assets, net
684

 
168

Other assets
404

 
133

Total assets
$
43,724

 
$
40,774

LIABILITIES AND EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
247

 
$
257

Notes payable
2,000

 
1,000

Funds payable and amounts due to customers
22,451

 
19,742

Accrued expenses and other current liabilities
1,866

 
1,781

Income taxes payable
76

 
83

Total current liabilities
26,640

 
22,863

Deferred tax liability and other long-term liabilities
1,969

 
1,917

Total liabilities
28,609

 
24,780

Commitments and Contingencies (Note 13)

 


Equity:
 
 
 
Common stock, $0.0001 par value; 4,000 shares authorized; 1,178 and 1,200 shares outstanding as of September 30, 2018 and December 31, 2017, respectively
—

 
—

Treasury stock at cost, 84 and 47 shares as of September 30, 2018 and December 31, 2017, respectively
(4,911
)
 
(2,001
)
Additional paid-in-capital
14,664

 
14,314

Retained earnings
5,296

 
3,823

Accumulated other comprehensive income (loss)
66

 
(142
)
Total equity
15,115

 
15,994

Total liabilities and equity
$
43,724

 
$
40,774

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

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Table of Contents

PayPal Holdings, Inc.
CONDENSED CONSOLIDATED STATEMENT OF INCOME
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
 
(In millions, except per share data)
 
(Unaudited)
Net revenues
$
3,683

 
$
3,239

 
$
11,225

 
$
9,350

Operating expenses:
 
 
 
 
 
 
 
Transaction expense
1,366

 
1,102

 
4,003

 
3,153

Transaction and loan losses
295

 
363

 
934

 
971

Customer support and operations
367

 
346

 
1,075

 
998

Sales and marketing
326

 
278

 
924

 
800

Product development
269

 
240

 
782

 
686

General and administrative
354

 
293

 
1,061

 
840

Depreciation and amortization
188

 
194

 
553

 
578

Restructuring and other charges
28

 
—

 
297

 
40

Total operating expenses
3,193

 
2,816

 
9,629

 
8,066

Operating income
490

 
423

 
1,596

 
1,284

Other income (expense), net
43

 
28

 
94

 
52

Income before income taxes
533

 
451

 
1,690

 
1,336

Income tax expense
97

 
71

 
217

 
161

Net income
$
436

 
$
380

 
$
1,473

 
$
1,175

 
 
 
 
 
 
 
 
Net income per share:
 
 
 
 
 
 
 
Basic
$
0.37

 
$
0.32

 
$
1.24

 
$
0.98

Diluted
$
0.36

 
$
0.31

 
$
1.22

 
$
0.96

 
 
 
 
 
 
 
 
Weighted average shares:
 
 
 
 
 
 
 
Basic
1,181

 
1,202

 
1,187

 
1,203

Diluted
1,199

 
1,223

 
1,206

 
1,218

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


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PayPal Holdings, Inc.
CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
 
(In millions)
 
(Unaudited)
Net income
$
436

 
$
380

 
$
1,473

 
$
1,175

Other comprehensive income (loss), net of reclassification adjustments:
 
 
 
 
 
 
 
Foreign currency translation
(6
)
 
9

 
(33
)
 
38

Unrealized gains (losses) on investments, net
4

 
4

 
(6
)
 
5

Tax (expense) benefit on unrealized gains (losses) on investments, net
(1
)
 
(1
)
 
2

 
(2
)
Unrealized gains (losses) on hedging activities, net
34

 
(57
)
 
249

 
(246
)
Tax (expense) benefit on unrealized gains (losses) on hedging activities, net
(1
)
 
1

 
(4
)
 
4

Other comprehensive income (loss), net of tax
30

 
(44
)
 
208

 
(201
)
Comprehensive income
$
466

 
$
336

 
$
1,681

 
$
974

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


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Table of Contents

PayPal Holdings, Inc.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
 
Nine Months Ended September 30,
 
2018
 
2017
 
(In millions)
 
(Unaudited)
Cash flows from operating activities:
 
 
 
Net income
$
1,473

 
$
1,175

Adjustments:
 
 
 
Transaction and loan losses
934

 
971

Depreciation and amortization
553

 
578

Stock-based compensation
623

 
514

Deferred income taxes
(34
)
 
13

Cost basis adjustments to loans and interest receivable held for sale
244

 
—

Other
(79
)
 
(16
)
Changes in assets and liabilities:
 
 
 
Accounts receivable
(133
)
 
(5
)
Changes in loans and interest receivable held for sale, net
1,407

 
16

Accounts payable
5

 
4

Income taxes payable
(21
)
 
24

Other assets and liabilities
(623
)
 
(596
)
Net cash provided by operating activities
4,349

 
2,678

Cash flows from investing activities:
 
 
 
Purchases of property and equipment
(599
)
 
(487
)
Changes in principal loans receivable, net
3,573

 
(1,154
)
Purchases of investments
(15,641
)
 
(14,227
)
Maturities and sales of investments
15,947

 
13,029

Acquisitions, net of cash acquired
(2,136
)
 
(323
)
Funds receivable
(427
)
 
(461
)
Net cash provided by (used in) investing activities
717

 
(3,623
)
Cash flows from financing activities:
 
 
 
Proceeds from issuance of common stock
83

 
100

Purchases of treasury stock
(2,925
)
 
(706
)
Tax withholdings related to net share settlements of equity awards
(392
)
 
(140
)
Borrowings under financing arrangements
2,075

 
800

Repayments under financing arrangements
(1,101
)
 
(180
)
Funds payable and amounts due to customers
2,767

 
2,553

Net cash provided by financing activities
507

 
2,427

Effect of exchange rate changes on cash, cash equivalents and restricted cash
(89
)
 
35

Net change in cash, cash equivalents and restricted cash
5,484

 
1,517

Cash, cash equivalents and restricted cash at beginning of period
8,285

 
6,119

Cash, cash equivalents and restricted cash at end of period
$
13,769

 
$
7,636

Supplemental cash flow disclosures:
 
 
 
Cash paid for interest
$
47

 
$
3

Cash paid for income taxes, net
$
228

 
$
88

 
 
 
 
The below table reconciles cash, cash equivalents and restricted cash as reported in the condensed consolidated balance sheet to the total of the same amounts shown in the condensed consolidated statement of cash flows:
 
 
 
Cash and cash equivalents
$
8,147

 
$
2,330

Short term investments
16

 
19

Funds receivable and customer accounts
5,606

 
5,287

Total cash, cash equivalents and restricted cash shown in the condensed consolidated statement of cash flows
$
13,769

 
$
7,636


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

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Table of Contents
PayPal Holdings, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


Note 1—Overview and Summary of Significant Accounting Policies

Overview and Organization

PayPal Holdings, Inc. ("PayPal," the "Company," "we," "us," or "our") was incorporated in Delaware in January 2015 and is a leading technology platform and digital payments company that enables digital and mobile payments on behalf of consumers and merchants worldwide. Our vision is to democratize financial services, as we believe that managing and moving money is a right for all people, not just the affluent. Our goal is to increase our relevance for consumers and merchants to manage and move their money anywhere in the world, anytime, on any platform and using any device. We also facilitate person-to-person payments through our PayPal, Venmo and Xoom products. Our combined payment solutions, including our PayPal, PayPal Credit, Braintree, Venmo, and Xoom products, compose our proprietary Payments Platform.

We operate globally and in a rapidly evolving regulatory environment characterized by a heightened regulatory focus on all aspects of the payments industry. That focus continues to become even more heightened as regulators on a global basis focus on such important issues as countering terrorist financing, anti-money laundering, privacy and consumer protection. Some of the laws and regulations to which we are subject were enacted recently, and the laws and regulations applicable to us, including those enacted prior to the advent of digital and mobile payments, are continuing to evolve through legislative and regulatory action and judicial interpretation. Non-compliance with laws and regulations, increased penalties and enforcement actions related to non-compliance, changes in laws and regulations or their interpretation, and the enactment of new laws and regulations applicable to us could have a material adverse impact on our business, results of operations and financial condition.

Significant Accounting Policies

Basis of Presentation and Principles of Consolidation
The condensed consolidated financial statements include the financial statements of PayPal and our wholly and majority-owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation. Investments in entities where we hold less than a 20% ownership interest are generally accounted for at cost minus impairment, if any, and are adjusted for changes resulting from observable price changes, which are included in other income (expense), net on our condensed consolidated statement of income. Our investment balance is included in long-term investments on our condensed consolidated balance sheet.
These condensed consolidated financial statements and accompanying notes should be read in conjunction with the audited consolidated financial statements and accompanying notes included in our Annual Report on Form 10-K for the year ended December 31, 2017 (the "2017 Form 10-K") filed with the Securities and Exchange Commission.
In the opinion of management, these condensed consolidated financial statements reflect all adjustments, consisting only of normal recurring adjustments, which are necessary for fair presentation of the condensed consolidated financial statements for interim periods. We have evaluated all subsequent events through the date the financial statements were issued. Certain amounts for prior years have been reclassified to conform to the financial presentation as of and for the three and nine months ended September 30, 2018.

Use of Estimates

The preparation of condensed consolidated financial statements in conformity with U.S. generally accepted accounting principles ("GAAP") requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses, during the reporting period. On an ongoing basis, we evaluate our estimates, including those related to provisions for transaction and loan losses, loss contingencies, income taxes, revenue recognition and the valuation of goodwill and intangible assets. We base our estimates on historical experience and various other assumptions which we believe to be reasonable under the circumstances. Actual results could differ from those estimates.


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PayPal Holdings, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Recent Accounting Guidance

In 2016, the Financial Accounting Standards Board (“FASB”) issued new accounting guidance related to accounting for leases, which will require lessees to recognize lease assets and lease liabilities on the balance sheet for the rights and obligations created by all leases with terms greater than 12 months. As we are not a lessor, other changes in the guidance applicable to lessors do not apply. Additionally, in 2018, the FASB issued codification and targeted improvements to this guidance effective for fiscal years and interim periods within those years beginning after December 15, 2018, with early adoption permitted. We will adopt the new guidance on January 1, 2019, using a modified retrospective basis and anticipate applying the optional practical expedients related to the transition. We estimate an increase of approximately $500 million for the right of use lease assets and lease liabilities associated with our operating leases upon adoption. We do not believe the adoption of this guidance will have a significant impact to our consolidated statements of earnings, stockholders’ equity, and cash flows.

In 2016, the FASB issued new guidance on the measurement of credit losses on financial instruments. Credit losses on loans, trade and other receivables, held-to-maturity debt securities and other instruments will reflect our current estimate of the expected credit losses that generally will result in the earlier recognition of allowances for losses. Credit losses on available-for-sale debt securities with unrealized losses will be recognized as allowances for credit losses limited to the amount by which fair value is below amortized cost. Additional disclosures will be required, including information used to track credit quality by year of origination for most financing receivables. The new guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019, with early adoption permitted. We will adopt the new guidance effective January 1, 2020. We are 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 with impairment of available-for-sale debt securities applied prospectively after adoption. We are evaluating the impact of and approach to adopting this new accounting guidance on our financial statements.

In 2017, the FASB issued new guidance that requires certain premiums on callable debt securities to be amortized to the earliest call date. The amortization period for callable debt securities purchased at a discount will not be impacted.  The new guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018, with early adoption permitted. Transition is on a modified retrospective basis with a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is adopted. We are evaluating the impact this new accounting guidance will have on our financial statements.

In 2018, the FASB issued new guidance in response to tax reform that allows the option to reclassify stranded tax effects resulting from the Tax Cuts and Jobs Act of 2017 (the "Tax Act") from accumulated other comprehensive income to retained earnings. The new guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018, with early adoption permitted. We will adopt the new guidance effective January 1, 2019. If such an option is elected, transition can be applied either retrospectively to each period in which the effect of tax reform is recognized or applied with a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is adopted. The adoption of this guidance is not expected to have a material impact on our financial statements.

In 2018, the FASB issued amended guidance to remove, modify and add disclosure requirements for fair value measurements. This amendment is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019, with early adoption permitted for any removed or modified disclosure requirements. Transition is on a prospective basis for the new and modified disclosures, and on a retrospective basis for disclosures that have been eliminated. The adoption of this guidance is not expected to have a material impact on our financial statements.

In 2018, the FASB issued amended guidance on the disclosure requirements for defined benefit pension or other post-retirement plans. The amended guidance removes certain disclosure requirements and adds others including requiring disclosure related to interest credit ratings and changes in benefit obligations. This amendment is effective for fiscal years beginning after December 15, 2020, with early adoption permitted, and requires retrospective adoption for all periods presented. We are evaluating the impact this amended disclosure guidance may have on the footnotes to our financial statements.


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PayPal Holdings, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

In 2018, the FASB issued new accounting guidance intended to align the requirements for capitalization of implementation costs incurred in a cloud computing arrangement that is a service contract with the existing guidance for internal-use software. Capitalized implementation costs should be amortized over the term of the hosting arrangement and recorded in the same financial statement line items as amounts for the hosting arrangement. The new guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019, with early adoption permitted. The guidance provides flexibility in adoption, allowing for either retrospective adjustment or prospective adjustment for all implementation costs incurred after the date of adoption. We are evaluating the impact this new accounting guidance will have on our financial statements.

Recently Adopted Accounting Guidance

In 2014, the FASB issued new accounting guidance related to revenue recognition, which was further updated in 2016 for reporting revenue on a gross versus net basis. This new guidance replaced all existing GAAP guidance on this topic and eliminated all industry-specific guidance. The new revenue recognition guidance provides a unified model to determine when and how revenue is recognized. The core principle is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration for which the entity expects to be entitled in exchange for those goods or services. We adopted the guidance effective January 1, 2018 on a full retrospective basis. We performed an impact analysis for the opening balance sheet as of January 1, 2016 as well as for the years ended December 31, 2016 and 2017. The impacts were deemed de minimis. No practical expedients or exemptions were elected in conjunction with the adoption of this new guidance. For additional information, see "Note 2—Revenue."

In 2016, the FASB issued new accounting guidance related to the classification and measurement of financial instruments. This new guidance amends GAAP by requiring equity investments to be measured at fair value with changes in fair value recognized in net income. This new guidance also amends the presentation of certain fair value changes for financial liabilities measured at fair value and it amends certain disclosure requirements associated with the fair value of financial instruments. Additionally, in 2018, the FASB issued technical corrections and improvements to this guidance effective for fiscal years beginning after December 15, 2017 and interim periods within those fiscal years beginning after June 15, 2018. We are required to apply the new guidance on a modified retrospective basis to all outstanding instruments, with a cumulative effect adjustment as of the date of adoption and on a prospective basis to all outstanding equity investments without a readily determinable fair value. We adopted the guidance, including early adoption of the technical corrections and improvements, effective January 1, 2018. Beginning in the first quarter of 2018, we applied the measurement alternative to all our equity investments, which required us to measure these equity investments at cost minus impairment, if any, and adjust for changes resulting from observable price changes in orderly transactions for an identical or similar investment in the same issuer. For additional information on the impact the adoption of this guidance had on our financial statements during the three and nine months ended September 30, 2018, please refer to "Note 8—Investments."

In 2016, the FASB issued new guidance on classifying certain cash receipts and cash payments on the statement of cash flows. The new guidance addresses the classification of cash flows related to: debt prepayment or extinguishment costs, settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing, contingent consideration payments made after a business combination, proceeds from the settlement of insurance claims, proceeds from the settlement of corporate-owned life insurance, including bank-owned life insurance, distributions received from equity method investees and beneficial interests in securitization transactions. The guidance also clarifies how the predominance principle should be applied when cash receipts and cash payments have aspects of more than one class of cash flows. The guidance should be applied retrospectively after adoption. We adopted the guidance effective January 1, 2018. The adoption of this guidance did not have a material impact on our financial statements.

In 2016, the FASB issued new guidance on restricted cash on the statement of cash flows. The new guidance requires the classification and presentation of changes in restricted cash and cash equivalents in the statement of cash flows. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning and ending balances shown on the statement of cash flows. The guidance should be applied retrospectively after adoption. We adopted the guidance effective January 1, 2018 on a retrospective basis. The beginning and ending balances of cash and cash equivalents on the statement of cash flows now include restricted cash and restricted cash equivalents, such as cash and cash equivalents underlying customer accounts and restricted cash and restricted cash equivalents within short-term investments.

In 2017, the FASB issued new guidance clarifying the scope and application of the de-recognition of non-financial assets and the sale or transfer of non-financial assets, including partial sales. We adopted the guidance effective January 1, 2018 on a full retrospective basis. The adoption of this guidance did not have a material impact on our financial statements.

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PayPal Holdings, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


In 2017, the FASB issued new guidance clarifying which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting. Specifically, an entity would apply modification accounting only if the fair value, vesting conditions, or classification of the awards changes as a result of changes in the terms or conditions. We adopted the guidance effective January 1, 2018 and applied it prospectively upon adoption. The adoption of this guidance did not have a material impact on our financial statements.

In 2017, the FASB issued new guidance intended to better align the results of hedge accounting with an entity’s risk management activities. This guidance updates the designation and measurement guidance for qualifying hedging relationships by expanding hedge accounting for both nonfinancial and financial risk components and by refining the measurement of hedge results to better reflect an entity’s hedging strategies. The amendments also align the recognition and presentation of the effects of the hedge results in the financial statements to increase the understandability of the results of an entity’s intended hedging strategies. Additionally, the guidance includes certain targeted improvements to ease the operational burden of applying hedge accounting. We are required to apply the guidance with a cumulative-effect adjustment to retained earnings as of the beginning of the fiscal year in which the guidance is adopted and prospectively apply the presentation and disclosure guidance. We early adopted the guidance in the first quarter of 2018 using a modified retrospective approach to reflect application of the new guidance effective January 1, 2018. The adoption of this guidance did not have a material impact on our financial statements.

In 2018, the FASB issued new guidance to provide clarity around application of income tax accounting in situations where the assessment of tax implications of the Tax Act might not be complete as of period end in which the Tax Act was enacted. This guidance prescribes that an entity must reflect the income tax impact of the Tax Act in the period in which the tax accounting is complete and allows an entity to report provisional amounts for those specific effects of the Tax Act for which the accounting is incomplete but a reasonable estimate can be determined. No provisional amounts should be reported for specific effects of the Tax Act for which a reasonable estimate cannot be determined, and the entity should continue to apply the provisions of the tax laws that were in effect prior to the enactment of the Tax Act. It further allows a measurement period of one year from the date of enactment within which to complete the accounting for all impacts of the Tax Act. Our financial statements reflect tax accounting in compliance with this guidance.

In 2018, the FASB amended existing guidance to include share-based payment transactions for acquiring goods and services from nonemployees. This amendment prescribes that entities should apply the requirements for employee share-based payment compensation to nonemployee awards used to acquire goods and services, except for specific guidance on inputs to an option pricing model and the attribution of cost (period of time that the awards vest and pattern of recognition). The new guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018, with early adoption permitted. We adopted the guidance effective April 1, 2018. The adoption of this guidance did not have a material impact on our financial statements.

Note 2—Revenue

PayPal enables its customers to send and receive payments. We earn revenue primarily by completing payment transactions for our customers on our Payments Platforms and from other value added services. Our revenues are classified into two categories, transaction revenues and revenues from other value added services.
Transaction Revenues
We earn transaction revenues primarily from fees charged to merchants and consumers on a transaction basis. These fees may have a fixed and variable component. The variable component is generally a percentage of the value of the payment amount and is known at the time the transaction is processed. If the underlying transaction is approved for refund, we reimburse the variable component of the fee. We estimate the amount of fee refunds that will be processed during the quarter and record a provision against our net revenues. The volume of activity processed on our Payments Platform, which results in transaction revenue, is referred to as Total Payments Volume (“TPV”). We define TPV as the value of payments, net of reversals, successfully completed on our Payments Platform or enabled by PayPal via a partner payment solution, not including gateway-exclusive transactions. We earn additional fees on transactions where we perform a currency conversion and when we enable cross-border transactions (i.e., transactions where the merchant and consumer are in different countries).


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PayPal Holdings, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Our contracts with our customers are usually open-ended and can be terminated by either party without a termination penalty after the notice period has lapsed. Therefore, our contracts are defined at the transaction level and do not extend beyond the service already provided. Our contracts generally renew automatically without significant material rights. Some of our contracts include tiered pricing, based primarily on volume. The fee charged per transaction is adjusted up or down if the volume processed for a specified period is different from prior period defined volumes. We have concluded that this volume-based pricing approach does not constitute a future material right since the discount is within a range typically offered to class of customers with similar volume. We do not have any capitalized contract costs, and do not carry any contract balances.

Our service comprises a single performance obligation to complete payments on our Payments Platform for our customers. Using our risk assessment tools, we perform a transaction risk assessment on individual transactions to determine whether a transaction should be authorized for completion on our Payment Platform. Once our authorization is provided to the customer, PayPal becomes obligated to our customer to complete the payment transaction.

We recognize fees charged to our customers primarily on a gross basis as transaction revenue when we are the principal in respect of completing a payment transaction. As a principal to the transaction, we control the service of completing payments on our Payments Platform. We bear primary responsibility for the fulfillment of the payment service, contract directly with our customers, control the product specifications and define the value proposal from our services. Further, we have full discretion in determining the fee charged to our customers, which is independent of the costs we incur in instances where we may utilize payment processors or other financial institutions to perform services on our behalf. We therefore bear full margin risk when completing a payment transaction. These fees paid to payment processors and other financial institutions are recognized as transaction expense. We are also responsible for providing customer support.

We provide merchants and consumers with protection programs on most transactions completed on our Payments Platforms, except for transactions using our gateway products or where our customer agreements specifically do not provide for protections. These programs protect both merchants and consumers from loss primarily due to fraud and counterparty performance. Our buyer protection program provides protection to consumers for qualifying purchases by reimbursing the consumer for the full amount of the purchase if a purchased item does not arrive or does not match the seller’s description. Our seller protection programs provide protection to merchants against claims that a transaction was not authorized by the buyer or claims that an item was not received by covering the seller for the full amount of the payment on eligible sales. These protection programs do not provide a separate service to our customers and we estimate and record associated costs in transaction and loan losses during the period the payment transaction is completed.
Revenues from Other Value Added Services
We earn revenues from other value added services which comprise of revenue earned through partnerships, subscription fees, gateway fees, and other services that we provide to our merchants and consumers. The contracts for these services cannot usually be terminated by either party without penalty. These contracts typically have one performance obligation which is provided and recognized over the term of the contract. The transaction price is generally fixed and known at the end of each reporting period; however, for some agreements, it may be necessary to estimate the transaction price using the expected value method.
We recognize revenue received from our financial institution partners on a net basis when we are considered the agent with respect to processing transactions. As we are an agent to the transaction, our financial institution partners directly contract with the end customers and are ultimately responsible for the fulfillment of the services. In an agent relationship, we may have some discretion in determining the fee charged to end customers, but always in conjunction with a financial institution partner. As a result, related costs incurred by our financial institution partners when we are an agent are included as a reduction to the revenue share received.
We also earn revenues from interest and fees earned on our loans receivable portfolio, gain on sale of participation interest in certain loans and advances and interest earned on certain PayPal customer account balances. Interest and fees earned on the PayPal credit portfolio of loans receivable are computed and recognized based on contractual interest and fee rates and are net of any required reserves and amortization of deferred origination costs.

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PayPal Holdings, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Disaggregation of Revenue

We determine operating segments based on how our chief operating decision maker (“CODM”) manages the business, makes operating decisions around the allocation of resources and evaluates operating performance. Our CODM is our Chief Executive Officer, who reviews our operating results on a consolidated basis. We operate in one segment and have one reportable segment. Based on the information provided to and reviewed by our CODM, we believe that the nature, amount, timing and uncertainty of our revenue and cash flows and how they are affected by economic factors is most appropriately depicted through our primary geographical markets and type of revenue (transaction and other value added services) categories. Revenues recorded within these categories are earned from similar services for which the nature of associated fees and the related revenue recognition models are substantially the same.

The following table presents our revenues disaggregated by primary geographical markets and type of revenue:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
  
2017
 
2018
  
2017
 
(In millions)
Primary geographical markets
 
 
 
 
 
 
 
United States ("U.S.")
$
1,962

 
$
1,743

 
$
6,135

 
$
5,039

United Kingdom ("U.K.")
397

 
351

 
1,191

 
998

Other countries(1)
1,324

 
1,145

 
3,899

 
3,313

Total revenues(2)
$
3,683

 
$
3,239

 
$
11,225

 
$
9,350

 
 
 
 
 
 
 
 
Types of revenues
 
 
 
 
 
 
 
Transaction revenues
$
3,343

 
$
2,858

 
$
9,858

 
$
8,257

Other value added services
340

 
381

 
1,367

 
1,093

Total revenues(2)
$
3,683

 
$
3,239

 
$
11,225

 
$
9,350

(1) No single country included in the other countries category generated more than 10% of total revenue.
(2) Total revenues include interest, fees and gains earned on loan and interest receivables, net and held for sale portfolio, as well as hedging gains or losses and interest earned on certain PayPal customer balances of $173 million and $287 million for the three months ended September 30, 2018 and 2017, respectively, and $973 million and $894 million for the nine months ended September 30, 2018 and 2017, respectively, which do not represent revenues recognized in the scope of ASC Topic 606, Revenue from contracts with customers.

Net revenues are attributed to the U.S., the U.K. and other countries primarily based upon the country in which the merchant is located, or in the case of a cross-border transaction, may be earned from the country in which the consumer and the merchant respectively reside. Net revenues earned from other value added services are typically attributed to the country in which either the customer or partner reside.

Note 3—Net Income Per Share

Basic net income per share is computed by dividing net income for the period by the weighted average number of common shares outstanding during the period. Diluted net income per share is computed by dividing net income for the period by the weighted average number of shares of common stock and potentially dilutive common stock outstanding for the period. The dilutive effect of outstanding equity incentive awards is reflected in diluted net income per share by application of the treasury stock method. The calculation of diluted net income per share excludes all anti-dilutive common shares.

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PayPal Holdings, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


The following table sets forth the computation of basic and diluted net income per share for the periods indicated:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
  
2017
 
2018
  
2017
 
(In millions, except per share amounts)
Numerator:
 
 
 
 
 
 
 
Net income
$
436

 
$
380

 
$
1,473

 
$
1,175

Denominator:
 
 
 
 
 
 
 
Weighted average shares of common stock - basic
1,181

 
1,202

 
1,187

 
1,203

Dilutive effect of equity incentive awards
18

 
21

 
19

 
15

Weighted average shares of common stock - diluted
1,199

 
1,223

 
1,206

 
1,218

Net income per share:
 
 
 
 
 
 
 
Basic
$
0.37

 
$
0.32

 
$
1.24

 
$
0.98

Diluted
$
0.36

 
$
0.31

 
$
1.22

 
$
0.96

Common stock equivalents excluded from income per diluted share because their effect would have been anti-dilutive
—

 
—

 
—

 
2


Note 4—Business Combinations

Acquisitions Completed in 2018

During the three and nine months ended September 30, 2018, we completed two and three acquisitions, respectively, reflecting 100% of the equity interests of the acquired companies, for an aggregate purchase price of $2.3 billion.

iZettle

We completed the acquisition of iZettle AB (publ) (“iZettle”) in September 2018 by acquiring all the outstanding shares for a total purchase price of $2.2 billion, consisting of cash consideration paid of approximately $2.1 billion (net of cash acquired of $107 million) and restricted shares of PayPal with a fair value of approximately $22 million. We acquired iZettle to expand our in-store presence and strengthen our Payments Platform to help small businesses around the world grow and thrive in an omnichannel retail environment.

The following table summarizes the preliminary allocation of the purchase consideration to the fair value of the assets acquired and liabilities assumed:
 
(In millions)
Goodwill
$
1,649

Customer lists and user base
349

Marketing related
102

Developed technologies
121

All other
1

Total intangibles
$
573

Cash
107

Funds receivable and customer accounts
49

Funds payable and amounts due to customers
(49
)
Deferred tax liabilities, net
(91
)
Other net liabilities
(56
)
Total purchase consideration
$
2,182


13
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PayPal Holdings, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

The intangible assets acquired consists primarily of merchant relationships, trade name/trademarks, developed technologies, and existing acquirer relationships with estimated useful lives ranging from 3 to 7 years. The excess of the purchase consideration over the fair value of net tangible and identifiable intangible assets acquired was recorded as goodwill, which is attributable to the workforce of iZettle and the synergies expected to arise from the acquisition. We do not expect goodwill to be deductible for income tax purposes. The allocation of the purchase price for this acquisition has been prepared on a preliminary basis and changes to the allocation to certain assets, liabilities and tax estimates may occur as additional information becomes available.

Simility

We completed the acquisition of Simility, Inc. ("Simility") in July 2018 by acquiring all the outstanding shares for a total purchase price of $107 million, consisting of cash consideration. We acquired Simility to enhance our ability to deliver fraud prevention and risk management solutions to merchants globally. The allocation of purchase consideration resulted in approximately $18 million of developed technologies intangible assets with an estimated useful life of 3 years, net assets of approximately $9 million, and initial goodwill of approximately $80 million, which is attributable to the workforce of Simility and the synergies expected to arise from the acquisition. We do not expect goodwill to be deductible for income tax purposes. The allocation of the purchase price for this acquisition has been prepared on a preliminary basis and changes to the allocation to certain assets, liabilities and tax estimates may occur as additional information becomes available.

Other Acquisitions

In May 2018, we completed an acquisition which was accounted for as a business combination. The total purchase price for this acquisition was $16 million, consisting of cash consideration. The allocation of purchase consideration resulted in approximately $13 million of developed technologies intangible assets with an estimated useful life of 2 years and initial goodwill of approximately $3 million, which is attributable to the workforce of the acquired company and the synergies expected to arise from the acquisition. We do not expect goodwill to be deductible for income tax purposes. The allocation of the purchase price for this acquisition has been prepared on a preliminary basis and changes to the allocation to certain assets, liabilities and tax estimates may occur as additional information becomes available.

We have included the financial results of the acquired businesses in our condensed consolidated financial statements from the date of acquisition. Revenues and expenses related to these acquisitions for the three and nine months ended September 30, 2018 were not material. Pro forma results of operations have not been presented because the effects of these acquisitions were not material to our financial results.

Acquisitions Completed in 2017

During the three and nine months ended September 30, 2017, we completed two acquisitions, reflecting 100% of the equity interests of the acquired companies, for an aggregate purchase price of $420 million.

TIO Networks Corp.

We completed the acquisition of TIO Networks Corp. (“TIO”) in July 2017 by acquiring all the outstanding shares of TIO for $2.64 per share in cash. We acquired TIO to expand our scale of operations, complement our product portfolio, and to help accelerate our entry into bill payments. The total purchase price of $238 million consisted of cash consideration. The allocation of purchase consideration resulted in approximately $66 million of technology and customer-related intangible assets with an estimated useful life of 1 to 5 years, net assets of approximately $6 million and goodwill of approximately $166 million, which is attributable to the workforce of TIO and the synergies expected to arise from the acquisition. We expect that not all of the goodwill will be deductible for income tax purposes.

In November 2017, we suspended the operations of TIO to protect customer data as part of an ongoing investigation of security vulnerabilities of the TIO platform. Refer to Note 13—"Commitments and Contingencies—Litigation and Regulatory Matters" for further details.


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PayPal Holdings, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Swift Financial Corporation

We completed the acquisition of Swift Financial Corporation (“Swift”) in September 2017 by acquiring all the outstanding shares of Swift for a total purchase price of approximately $182 million. We acquired Swift to enable us to enhance our underwriting capabilities and strengthen our business financing offerings, helping us to deepen relationships with our existing merchants and expand services to new merchants. The allocation of purchase consideration resulted in approximately $44 million of technology and customer-related intangible assets with an estimated useful life of 1 to 3 years, $169 million of merchant receivables, net liabilities of approximately $129 million and goodwill of approximately $98 million, which is attributable to the workforce of Swift and the synergies expected to arise from the acquisition. We do not expect goodwill to be deductible for income tax purposes. The gross contractual merchant receivables acquired were approximately $213 million. Management estimates that the cash collected will approximate the contractual amounts of merchant receivables.

Note 5—Goodwill and Intangible Assets

Goodwill

The following table presents goodwill balances and adjustments to those balances during the nine months ended September 30, 2018:
 
December 31,
2017
 
Goodwill
Acquired
 
Adjustments
 
September 30,
2018
 
 (In millions)
Total goodwill
$
4,339

 
$
1,732

 
$
(17
)
 
$
6,054


The adjustments to goodwill during the nine months ended September 30, 2018 pertain to measurement period adjustments related to our acquisitions of Swift and TIO completed in the third quarter of 2017 and foreign currency translation adjustments.

Intangible Assets

The components of identifiable intangible assets are as follows:
 
September 30, 2018
 
December 31, 2017
 
Gross Carrying Amount  
 
Accumulated Amortization 
 
Net Carrying Amount
 
Weighted Average Useful Life (Years)
 
Gross Carrying Amount 
 
Accumulated Amortization 
 
Net Carrying Amount
 
Weighted Average Useful Life (Years)
 
(In millions, except years)
Intangible assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Customer lists and user base
$
964

 
$
(598
)
 
$
366

 
7
 
$
613

 
$
(563
)
 
$
50

 
3
Marketing related
300

 
(199
)
 
101

 
3
 
198

 
(196
)
 
2

 
1
Developed technologies
425

 
(249
)
 
176

 
3
 
274

 
(215
)
 
59

 
3
All other
245

 
(204
)
 
41

 
5
 
245

 
(188
)
 
57

 
5
Intangible assets, net
$
1,934

 
$
(1,250
)
 
$
684

 
 
 
$
1,330

 
$
(1,162
)
 
$
168

 
 
        
Amortization expense for intangible assets was $34 million and $28 million for the three months ended September 30, 2018 and 2017, respectively. Amortization expense for intangible assets was $90 million and $96 million for the nine months ended September 30, 2018 and 2017, respectively.


15
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PayPal Holdings, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Expected future intangible asset amortization as of September 30, 2018 was as follows (in millions):
Fiscal years:
 
Remaining 2018
$
53

2019
179

2020
160

2021
106

2022
50

Thereafter
136

 
$
684


Note 6—Other Financial Statement Details

Property and Equipment, Net

Geographical Information

The following table summarizes long-lived assets based on geography:

 
September 30,
2018
  
December 31,
2017
 
(In millions)
Long-lived assets:
 
 
 
U.S.
$
1,514

 
$
1,432

Other countries
132

 
96

Total long-lived assets
$
1,646

 
$
1,528


Tangible long-lived assets as of September 30, 2018 and December 31, 2017 consisted of property and equipment. Long-lived assets attributed to the U.S. and other countries are based upon the country in which the asset is located or owned.

Accumulated Other Comprehensive Income (Loss)

The following table summarizes the changes in accumulated balances of other comprehensive income (loss) for the three months ended September 30, 2018:
 
Unrealized Gains (Losses) on Cash Flow Hedges
 
Unrealized Gains (Losses) on Investments
 
Foreign
Currency
Translation
 
Estimated Tax Benefit (Expense)
 
Total
 
(In millions)
Beginning balance
$
104

 
$
(22
)
 
$
(52
)
 
$
6

 
$
36

Other comprehensive income (loss) before reclassifications
41

 
5

 
(6
)
 
(2
)
 
38

Less: Amount of gains (losses) reclassified from accumulated other comprehensive income
7

 
1

 
—

 
—

 
8

Net current period other comprehensive income (loss)
34

 
4

 
(6
)
 
(2
)
 
30

Ending balance
$
138

 
$
(18
)
 
$
(58
)
 
$
4

 
$
66



16
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PayPal Holdings, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

The following table summarizes the changes in accumulated balances of other comprehensive income (loss) for the three months ended September 30, 2017:
 
Unrealized Gains (Losses) on Cash Flow Hedges
 
Unrealized Gains (Losses) on Investments
 
Foreign
Currency
Translation
 
Estimated Tax Benefit
 
Total
 
(In millions)
Beginning balance
$
(58
)
 
$
(4
)
 
$
(39
)
 
$
3

 
$
(98
)
Other comprehensive income (loss) before reclassifications
(70
)
 
4

 
9

 
—

 
(57
)
Less: Amount of gains (losses) reclassified from accumulated other comprehensive income
(13
)
 
—

 
—

 
—

 
(13
)
Net current period other comprehensive income (loss)
(57
)
 
4

 
9

 
—

 
(44
)
Ending balance
$
(115
)
 
$
—

 
$
(30
)
 
$
3

 
$
(142
)

The following table summarizes the changes in accumulated balances of other comprehensive income (loss) for the nine months ended September 30, 2018:
 
Unrealized Gains (Losses) on Cash Flow Hedges
 
Unrealized Gains (Losses) on Investments
 
Foreign
Currency
Translation
 
Estimated Tax Benefit (Expense)
 
Total
 
(In millions)
Beginning balance
$
(111
)
 
$
(12
)
 
$
(25
)
 
$
6

 
$
(142
)
Other comprehensive income (loss) before reclassifications
183

 
(6
)
 
(33
)
 
(2
)
 
142

Less: Amount of gains (losses) reclassified from accumulated other comprehensive income
(66
)
 
—

 
—

 
—

 
(66
)
Net current period other comprehensive income (loss)
249

 
(6
)
 
(33
)
 
(2
)
 
208

Ending balance
$
138

 
$
(18
)
 
$
(58
)
 
$
4

 
$
66



The following table summarizes the changes in accumulated balances of other comprehensive income (loss) for the nine months ended September 30, 2017:
 
Unrealized Gains (Losses) on Cash Flow Hedges
 
Unrealized Gains (Losses) on Investments
 
Foreign
Currency
Translation
 
Estimated Tax Benefit
 
Total
 
(In millions)
Beginning balance
$
131

 
$
(5
)
 
$
(68
)
 
$
1

 
$
59

Other comprehensive income (loss) before reclassifications
(200
)
 
4

 
38

 
2

 
(156
)
Less: Amount of gains (losses) reclassified from accumulated other comprehensive income
46

 
(1
)
 
—

 
—

 
45

Net current period other comprehensive income (loss)
(246
)
 
5

 
38

 
2

 
(201
)
Ending balance
$
(115
)
 
$
—

 
$
(30
)
 
$
3

 
$
(142
)


17
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PayPal Holdings, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

The following table provides details about reclassifications from accumulated other comprehensive income (loss) for the three months ended September 30, 2018 and 2017:
Details about Accumulated Other Comprehensive
Income (Loss) Components
 
Amount of Gains (Losses) Reclassified from Accumulated Other Comprehensive Income (Loss)
 
Affected Line Item in the Statement of Income
 
 
Three Months Ended September 30,
 
 
 
 
2018
 
2017
 
 
 
 
(In millions)
 
 
Gains (losses) on cash flow hedges-foreign exchange contracts
 
$
7

 
$
(13
)
 
Net revenues
Unrealized gains (losses) on investments
 
1

 
—

 
Other income (expense), net
 
 
$
8

 
$
(13
)
 
Income before income taxes
 
 
—

 
—

 
Income tax expense
Total reclassifications for the period
 
$
8

 
$
(13
)
 
Net income
The following table provides details about reclassifications from accumulated other comprehensive income (loss) for the nine months ended September 30, 2018 and 2017:
Details about Accumulated Other Comprehensive
Income (Loss) Components
 
Amount of Gains (Losses) Reclassified from Accumulated Other Comprehensive Income (Loss)
 
Affected Line Item in the Statement of Income
 
 
Nine Months Ended September 30,
 
 
 
 
2018
 
2017
 
 
 
 
(In millions)
 
 
Gains (losses) on cash flow hedges-foreign exchange contracts
 
$
(66
)
 
$
46

 
Net revenues
Unrealized gains (losses) on investments
 
—

 
(1
)
 
Other income (expense), net
 
 
$
(66
)
 
$
45

 
Income before income taxes
 
 
—

 
—

 
Income tax expense
Total reclassifications for the period
 
$
(66
)
 
$
45

 
Net income

Other Income (Expense), Net

The following table reconciles the components of other income (expense), net for the three and nine months ended September 30, 2018 and 2017:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
  
2017
 
2018
  
2017
 
(In millions, except per share amounts)
Interest income
$
61

 
$
23

 
$
116

 
$
62

Interest expense
(22
)
 
(1
)
 
(57
)
 
(3
)
Other
4

 
6

 
35

 
(7
)
Other income (expense), net
$
43

 
$
28

 
$
94

 
$
52


Interest income consists of income earned on cash and cash equivalents in bank accounts and short-term and long-term investments. Interest expense consists of interest expenses, fees and amortization of debt discount on our credit agreements.


18
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PayPal Holdings, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Note 7—Funds Receivable and Customer Accounts

The following table summarizes the assets underlying our funds receivable and customer accounts as of September 30, 2018 and December 31, 2017:
 
September 30,
2018
 
December 31,
2017
 
(In millions)
Cash and cash equivalents
$
5,606

 
$
5,387

Government and agency securities
8,826

 
6,651

Time deposits
353

 
739

Corporate debt securities
1,507

 
1,248

Funds receivable
4,659

 
4,217

Total funds receivable and customer accounts
$
20,951

 
$
18,242


As of September 30, 2018 and December 31, 2017, the estimated fair value of our investments classified as available-for-sale included within funds receivable and customer accounts was as follows:
 
September 30, 2018
 
Gross
Amortized
Cost
  
Gross
Unrealized
Gains
  
Gross
Unrealized
Losses
 
Estimated
Fair Value
 
(In millions)
Government and agency securities
$
7,449

 
$
—

 
$
(3
)
 
$
7,446

Corporate debt securities
818

 
—

 
—

 
818

Total
$
8,267

 
$
—

 
$
(3
)
 
$
8,264


 
December 31, 2017
 
Gross
Amortized
Cost
  
Gross
Unrealized
Gains
  
Gross
Unrealized
Losses
 
Estimated
Fair Value
 
(In millions)
Government and agency securities
$
5,946

 
$
—

 
$
(5
)
 
$
5,941

Corporate debt securities
529

 
—

 
—

 
529

Total
$
6,475

 
$
—

 
$
(5
)
 
$
6,470


We elect to account for certain investments within customer accounts, including foreign-currency denominated available-for-sale investments, under the fair value option. As a result, any gains and losses from fair value changes on such investments are recognized in other income (expense), net on the condensed consolidated statement of income. Election of the fair value option allows us to significantly reduce the accounting asymmetry that would otherwise arise when recognizing the changes in the fair value of available-for-sale investments and the corresponding foreign exchange gains and losses relating to customer liabilities. As of September 30, 2018 and December 31, 2017, the estimated fair value of our investments included within funds receivable and customer accounts under the fair value option was $2.1 billion and $1.4 billion, respectively. In the three months ended September 30, 2018 and 2017, $18 million of net losses and $49 million of net gains from fair value changes, respectively, were recognized in other income (expense), net on the condensed consolidated statement of income. In the nine months ended September 30, 2018 and 2017, $87 million of net losses and $154 million of net gains from fair value changes, respectively, were recognized in other income (expense), net on the condensed consolidated statement of income.


19
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PayPal Holdings, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

The aggregate fair value of investments classified as available-for-sale included within funds receivable and customer accounts in an unrealized loss position was $6.9 billion as of September 30, 2018 and $6.0 billion as of December 31, 2017.  As of September 30, 2018 and December 31, 2017, we had no material investments that had been in a continuous unrealized loss position for greater than 12 months. The aggregate gross unrealized loss on our short-term and long-term investments was not material as of September 30, 2018 and December 31, 2017. We believe the decline in value is due to temporary market conditions and expect to recover the entire amortized cost basis of the securities. We neither intend nor anticipate the need to sell the securities before recovery. We will continue to monitor the performance of the investment portfolio and assess market and interest rate risk when evaluating whether other-than-temporary impairment exists. Amounts reclassified to earnings from unrealized gains and losses were not material for the three and nine months ended September 30, 2018 and 2017.

The estimated fair values of our investments classified as available-for-sale included within funds receivable and customer accounts by date of contractual maturity were as follows:
 
September 30,
2018
 
(In millions)
One year or less
$
8,208

One year through two years
56

Total
$
8,264


Note 8—Investments

As of September 30, 2018 and December 31, 2017, the estimated fair value of our short-term and long-term investments classified as available-for-sale was as follows:
 
September 30, 2018
 
Gross
Amortized
Cost
  
Gross
Unrealized
Gains
  
Gross
Unrealized
Losses
 
Estimated
Fair Value
 
(In millions)
Short-term investments(1)(2):
 
  
 
  
 
 
 
Corporate debt securities
$
888

 
$
—

 
$
(3
)
 
$
885

Government and agency securities
234

 
—

 
—

 
234

Long-term investments(1):
 
 
 
 
 
 


Corporate debt securities
727

 
—

 
(12
)
 
715

Government and agency securities
37

 
—

 
—

 
37

Total(1)(2)
$
1,886

 
$
—

 
$
(15
)
 
$
1,871

(1) Excludes short-term restricted cash of $76 million that we intend to use to support our global sabbatical program and a counterparty guarantee, and long-term restricted cash of $2 million.
(2) Excludes time deposits of $63 million, which are not considered available-for-sale securities.


20
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PayPal Holdings, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

 
December 31, 2017
 
Gross
Amortized
Cost
  
Gross
Unrealized
Gains
  
Gross
Unrealized
Losses
 
Estimated
Fair Value
 
(In millions)
Short-term investments(1)(2):
 
  
 
  
 
 
 
Corporate debt securities
$
2,092

 
$
1

 
$
(1
)
 
$
2,092

Government and agency securities
210

 
—

 
—

 
210

Long-term investments(1):
 
 
 
 
 
 
 
Corporate debt securities
1,769

 
2

 
(7
)
 
1,764

Government and agency securities
98

 
—

 
—

 
98

Total(1)(2)
$
4,169

 
$
3

 
$
(8
)
 
$
4,164

(1) Excludes short-term restricted cash of $79 million that we intend to use to support our global sabbatical program and a counterparty guarantee, and long-term restricted cash of $2 million.
(2) Excludes time deposits of $163 million, which are not considered available-for-sale securities.

We elected to account for foreign denominated available-for-sale investments held in our Luxembourg banking subsidiary under the fair value option. Election of the fair value option allows us to recognize any gains and losses from fair value changes on such investments in other income (expense), net on the condensed consolidated statement of income to offset certain foreign exchange gains and losses on our foreign denominated customer liabilities. As of September 30, 2018 and December 31, 2017, the estimated fair value of our investments included within short-term investments and long-term investments under the fair value option was $182 million and $277 million, respectively. In the three months ended September 30, 2018 and 2017, $4 million of net losses and $10 million of net gains, respectively, from fair value changes were recognized in other income (expense), net on the condensed consolidated statement of income. In the nine months ended September 30, 2018 and 2017, $10 million of net losses and $35 million of net gains, respectively, from fair value changes were recognized in other income (expense), net on the condensed consolidated statement of income.

The aggregate fair value of short-term and long-term investments classified as available-for-sale in an unrealized loss position was $1.7 billion as of September 30, 2018 and $2.8 billion as of December 31, 2017, of which $244 million and $207 million, respectively, was in a continuous unrealized loss position for greater than 12 months. The aggregate gross unrealized loss on our short-term and long-term investments was not material as of September 30, 2018 and December 31, 2017. We believe the decline in value is due to temporary market conditions and expect to recover the entire amortized cost basis of the securities. We neither intend nor anticipate the need to sell the securities before recovery. We will continue to monitor the performance of the investment portfolio and assess market and interest rate risk when evaluating whether other-than-temporary impairment exists. Amounts reclassified to earnings from unrealized gains and losses were not material for the three and nine months ended September 30, 2018 and 2017.

The estimated fair values of our short-term and long-term investments classified as available-for-sale by date of contractual maturity were as follows:
 
September 30, 2018
 
(In millions)
One year or less
$
1,119

One year through two years
513

Two years through three years
116

Three years through four years
115

Four years through five years
—

Greater than five years
8

Total
$
1,871



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PayPal Holdings, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Other Investments

We have equity investments which consist primarily of minority equity interests in companies that are not publicly traded and are reported in long-term investments on our condensed consolidated balance sheet. Our equity investments do not have a readily determinable fair value, therefore we measure these equity investments at cost minus impairment, if any, and are adjusted for changes resulting from observable price changes in orderly transactions for an identical or similar investment in the same issuer (the "Measurement Alternative"). All gains and losses on these investments, realized and unrealized, are recognized in other income (expense), net on our condensed consolidated statement of income. The carrying value of our equity investments totaled $192 million and $88 million as of September 30, 2018 and December 31, 2017, respectively.

Measurement Alternative Adjustments

The adjustments to the carrying value of our equity investments in the nine months ended September 30, 2018 were as follows:
 
(In millions)
Carrying amount, beginning of period
$
88

Adjustments related to equity investments:
 
Additions, net of sales
73

Gross unrealized gains on equity investments
31

Carrying amount, end of period
$
192


Unrealized gains for the nine months ended September 30, 2018 and cumulative unrealized gains related to equity investments still held at the reporting date were approximately $31 million.



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PayPal Holdings, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Note 9—Fair Value Measurement of Assets and Liabilities

Financial Assets and Liabilities Measured and Recorded at Fair Value on a Recurring Basis

The following tables summarize our financial assets and liabilities measured at fair value on a recurring basis as of September 30, 2018 and December 31, 2017:

 
September 30, 2018
 
 
Significant Other
Observable Inputs
(Level 2)
 
 
(In millions)
Assets:
 
 
 
 
 
Cash and cash equivalents(1)
 
$
2,529

 
 
$
2,529

Short-term investments(2):
 
 
 
 
 
Corporate debt securities
 
929

 
 
929

Government and agency securities
 
372

 
 
372

Total short-term investments
 
$
1,301

 
 
$
1,301

Funds receivable and customer accounts(3)
 
10,713

 
 
10,713

Derivatives
 
238

 
 
238

Long-term investments(2)(4):
 
 
 
 
 
Corporate debt securities
 
715

 
 
715

Government and agency securities
 
37

 
 
37

Total long-term investments
 
752

 
 
752

Total financial assets
 
$
15,533

 
 
$
15,533

Liabilities:
 
 
 
 
 
Derivatives
 
$
24

 
 
$
24

(1) Excludes cash of $5.6 billion not measured and recorded at fair value.
(2) Excludes restricted cash of $78 million and time deposits of $63 million not measured and recorded at fair value.
(3) Excludes cash, time deposits and funds receivable of $10.2 billion underlying funds receivable and customer accounts not measured and recorded at fair value.
(4) Excludes equity investments of $192 million measured using the Measurement Alternative.


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PayPal Holdings, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


 
December 31, 2017
 
 
Significant Other
Observable Inputs
(Level 2)
 
 
(In millions)
Assets:
 
 
 
 
 
Cash and cash equivalents(1)
 
$
791

 
 
$
791

Short-term investments(2):
 
 
 
 
 
Corporate debt securities
 
2,219

 
 
2,219

Government and agency securities
 
351

 
 
351

Total short-term investments
 
2,570

 
 
2,570

Funds receivable and customer accounts(3)
 
8,007

 
 
8,007

Derivatives
 
66

 
 
66

Long-term investments(2):
 
 
 
 
 
Corporate debt securities
 
1,773

 
 
1,773

Government and agency securities
 
98

 
 
98

Total long-term investments
 
1,871

 
 
1,871

Total financial assets
 
$
13,305

 
 
$
13,305

Liabilities:
 
 
 
 
 
Derivatives
 
$
218

 
 
$
218

(1) Excludes cash of $2.1 billion not measured and recorded at fair value.
(2) Excludes restricted cash of $81 million, time deposits of $163 million, and equity investments of $88 million not measured and recorded at fair value.
(3) Excludes cash, time deposits and funds receivable of $10.2 billion underlying funds receivable and customer accounts not measured and recorded at fair value.

Our financial assets and liabilities are valued using market prices on less active markets (Level 2). Level 2 instrument valuations are obtained from readily available pricing sources for comparable instruments, identical instruments in less active markets, or models using market observable inputs.

Cash and cash equivalents are short-term, highly liquid investments with original maturities of three months or less when purchased and are comprised primarily of bank deposits, government and agency securities and commercial paper.

We elect to account for foreign currency denominated available-for-sale investments underlying funds receivable and customer accounts, short term investments and long term investments under the fair value option as further discussed in "Note 7—Funds Receivable and Customer Accounts" and "Note 8—Investments."

A majority of our derivative instruments are valued using pricing models that take into account the contract terms as well as multiple inputs where applicable, such as currency rates, interest rate yield curves, option volatility and equity prices. Our derivative instruments are primarily short-term in nature, generally one month to one year in duration. Certain foreign currency contracts designated as cash flow hedges may have a duration of up to 18 months.

We did not have any transfers of financial instruments between valuation levels during the nine months ended September 30, 2018 and 2017. As of September 30, 2018, we did not have any assets or liabilities requiring measurement at fair value without observable market values that would require a high level of judgment to determine fair value (Level 3).

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PayPal Holdings, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


Financial Assets and Liabilities Measured and Recorded at Fair Value on a Non-Recurring Basis

The following table summarizes our financial assets and liabilities held as of September 30, 2018 for which a non-recurring fair value measurement was recorded during the nine months ended September 30, 2018:

 
 
Nine Months Ended September 30, 2018
 
Significant Other
Observable Inputs
(Level 2)
 
 
(In millions)
Equity investments measured using the Measurement Alternative
 
$
41

 
41


We measured these equity investments at cost plus adjustments resulting from observable price changes for a similar investment issued by the same issuer.

None of our financial assets and liabilities were measured at fair value on a non-recurring basis as of December 31, 2017.

Financial Assets and Liabilities Not Measured and Recorded at Fair Value

Our financial instruments, including cash, restricted cash, time deposits, loans and interest receivable, net, loans and interest receivable, held for sale, certain customer accounts, notes receivable, and notes payable, are carried at amortized cost, which approximates their fair value. If these financial instruments were measured at fair value in the financial statements, cash would be classified as Level 1, restricted cash, time deposits, loans and interest receivable, held for sale, certain customer accounts and notes payable would be classified as Level 2, and the remaining financial instruments would be classified as Level 3 in the fair value hierarchy.

Note 10—Derivative Instruments

Summary of Derivative Instruments

Our primary objective in holding derivatives is to reduce the volatility of earnings and cash flows associated with changes in foreign currency exchange rates. Our derivatives expose us to credit risk to the extent that our counterparties may be unable to meet the terms of the arrangement. We seek to mitigate such risk by limiting our counterparties to, and by spreading the risk across, major financial institutions. In addition, the potential risk of loss with any one counterparty resulting from this type of credit risk is monitored on an ongoing basis.

Foreign Exchange Contracts

We transact business in various foreign currencies and have significant international revenues and costs denominated in foreign currencies, which subjects us to foreign currency risk. We have a foreign currency exposure management program whereby we designate certain foreign currency exchange contracts, generally with maturities of 18 months or less, to reduce the volatility of cash flows primarily related to forecasted revenues and expenses denominated in foreign currencies. The objective of the foreign exchange contracts is to help mitigate the risk that the U.S. dollar-equivalent cash flows are adversely affected by changes in the applicable U.S. dollar/foreign currency exchange rate. These derivative instruments are designated as cash flow hedges and accordingly, the derivative’s gain or loss is initially reported as a component of accumulated other comprehensive income (loss) and subsequently reclassified into revenue in the same period the forecasted transaction affects earnings. We evaluate the effectiveness of our foreign exchange contracts on a monthly basis by comparing the change in the fair value of the derivative instruments with the change in the fair value of the forecasted cash flows of the hedged item. We did not exclude any component of the changes in fair value of the derivative instruments from the assessment of hedge effectiveness. We do not use any foreign exchange contracts for trading or speculative purposes.


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PayPal Holdings, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

We estimate that $122 million of net derivative gains related to our cash flow hedges included in accumulated other comprehensive income (loss) at September 30, 2018 is expected to be reclassified into earnings within the next 12 months. During the three and nine months ended September 30, 2018 and 2017, we did not discontinue any cash flow hedges because it was probable that the original forecasted transaction would not occur and as such, did not reclassify any gains or losses to earnings. If we elect to discontinue our cash flow hedges and it is probable that the original forecasted transaction will occur, we continue to report them in accumulated other comprehensive income (loss) until the forecasted transaction affects earnings, at which point we also reclassify the de-designated hedges into earnings. Gains and losses on derivatives held after we discontinue our cash flow hedge and gains and losses on derivative instruments that are not designated as cash flow hedges are recorded in the same financial statement line item to which the derivative relates.

We have an additional foreign currency exposure management program whereby we use foreign exchange contracts to offset the foreign exchange risk on our assets and liabilities denominated in currencies other than the functional currency of our subsidiaries. These contracts are not designated as hedging instruments and reduce, but do not entirely eliminate, the impact of currency exchange rate movements on our assets and liabilities. The foreign currency gains and losses on our assets and liabilities are recorded in other income (expense), net, which is offset by the gains and losses on the foreign exchange contracts.

Fair Value of Derivative Contracts

The fair value of our outstanding derivative instruments as of September 30, 2018 and December 31, 2017 was as follows:
 
Balance Sheet Location
 
September 30,
2018
 
December 31,
2017
 
 
 
(In millions)
Derivative Assets:
 
 
 
 
 
Foreign exchange contracts designated as cash flow hedges
Other current assets
 
$
118

 
$
—

Foreign exchange contracts designated as cash flow hedges
Other assets (non-current)
 
17

 
—

Foreign exchange contracts not designated as hedging instruments
Other current assets
 
103

 
66

Total derivative assets
 
 
$
238

 
$
66

 
 
 
 
 
 
Derivative Liabilities:
 
 
 
 
 
Foreign exchange contracts designated as cash flow hedges
Other current liabilities
 
$
1

 
$
94

Foreign exchange contracts not designated as hedging instruments
Other current liabilities
 
23

 
124

Total derivative liabilities
 
 
$
24

 
$
218

 
 
 
 
 
 


26
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PayPal Holdings, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Master Netting Agreements - Rights of Setoff

Under master netting agreements with respective counterparties to our foreign exchange contracts, subject to applicable requirements, we are allowed to net settle transactions of the same type with a single net amount payable by one party to the other. However, we have elected to present the derivative assets and derivative liabilities on a gross basis in our condensed consolidated balance sheet. Rights of setoff associated with our foreign exchange contracts represented a potential offset to both assets and liabilities by $18 million as of September 30, 2018 and $56 million as of December 31, 2017. During the year ended December 31, 2017, we entered into collateral security arrangements that provide for collateral to be received or posted when the net fair value of certain financial instruments fluctuates from contractually established thresholds. We posted $1 million and $38 million of cash collateral related to our derivative liabilities as of September 30, 2018 and December 31, 2017, respectively, which is recognized in other current assets on our condensed consolidated balance sheet and is related to the right to reclaim cash collateral. We received $135 million in counterparty cash collateral related to our derivative assets as of September 30, 2018, which is recognized in other current liabilities on our condensed consolidated balance sheet and is related to the obligation to return cash collateral. Additionally, as of September 30, 2018, we received $3 million in counterparty non-cash collateral in the form of debt securities. We did not receive any counterparty cash or non-cash collateral as of December 31, 2017. 

Effect of Derivative Contracts on Accumulated Other Comprehensive Income (Loss)

The following tables summarize the activity of derivative contracts that qualify for hedge accounting as of September 30, 2018 and December 31, 2017, and the impact of designated derivative instruments on accumulated other comprehensive income (loss) for the nine months ended September 30, 2018 and 2017:
 
December 31, 2017
 
Amount of gains (losses)
recognized in other
comprehensive income
 
Less: Amount of gains (losses)
reclassified from
accumulated other
comprehensive income
to net revenue
 
September 30, 2018
 
(In millions)
Foreign exchange contracts designated as cash flow hedges
$
(111
)
 
$
183

 
$
(66
)
 
$
138

 
December 31, 2016
 
Amount of gains (losses)
recognized in other
comprehensive income
 
Less: Amount of gains (losses)
reclassified from
accumulated other
comprehensive income
to net revenue
 
September 30, 2017
 
(In millions)
Foreign exchange contracts designated as cash flow hedges
$
131

 
$
(200
)
 
$
46

 
$
(115
)
 

27
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PayPal Holdings, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Effect of Derivative Contracts on Condensed Consolidated Statements of Income
The following table provides the location in the condensed consolidated statements of income and amount of recognized gains or losses related to our derivative instruments designated as hedging instruments:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
 
(In millions)
 
Net revenues
Total amounts presented in the condensed consolidated statement of income in which the effects of cash flow hedges are recorded
$
3,683

 
$
3,239

 
$
11,225

 
$
9,350

Gains (losses) on foreign exchange contracts designated as cash flow hedges reclassified from accumulated other comprehensive income into net income
$
7

 
$
(13
)
 
$
(66
)
 
$
46


The following table provides the location in the condensed consolidated statements of income and amount of recognized gains or losses related to our derivative instruments not designated as hedging instruments:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
 
(In millions)
Gains (losses) on foreign exchange contracts recognized in other income (expense), net
$
12

 
$
5

 
$
27

 
$
(50
)
Gains (losses) on foreign exchange contracts recognized in net revenues
4

 
$
—

 
5

 
$
—

Total gains (losses) recognized from foreign exchange contracts not designated as hedging instruments
$
16

 
$
5

 
$
32

 
$
(50
)


Notional Amounts of Derivative Contracts

Derivative transactions are measured in terms of the notional amount; however, this amount is not recorded on the balance sheet and is not, when viewed in isolation, a meaningful measure of the risk profile of the derivative instruments. The notional amount is generally not exchanged but is used only as the underlying basis on which the value of foreign exchange payments under these contracts is determined. The following table provides the notional amounts of our outstanding derivatives:
 
September 30, 2018
 
December 31, 2017
 
(In millions)
Foreign exchange contracts designated as cash flow hedges
$
2,977

 
$
2,639

Foreign exchange contracts not designated as hedging instruments
6,189

 
5,669

Total
$
9,166

 
$
8,308


Note 11—Loans and Interest Receivable

We offer credit products to consumers and certain small and medium-sized merchants. We work with independent chartered financial institutions that extend credit to the consumer or merchant using our credit products in the U.S. For our consumer credit products outside the U.S., we extend credit through our Luxembourg banking subsidiary. For our merchant credit products outside the U.S., we extend working capital advances in the U.K. through our Luxembourg banking subsidiary, and we extend working capital loans in Australia through an Australian subsidiary. Prior to July 2018, we purchased receivables related to credit extended to U.S. consumers by independent chartered financial institutions and were responsible for servicing functions related to that portfolio. Following the completion of the sale of our U.S. consumer credit receivables portfolio to Synchrony Bank in July 2018, we no longer purchase receivables related to the U.S. consumer loans, but remain responsible for the servicing functions related to the sold portfolio through a transition period. We purchase receivables related to credit extended to U.S. merchants by an independent chartered financial institution and are responsible for servicing functions related to that portfolio. During both the nine months ended September 30, 2018 and 2017, we purchased approximately $7.0 billion in credit receivables.

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PayPal Holdings, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


Loans and Interest Receivable, Held for Sale

In November 2017, we reached an agreement to sell our U.S. consumer credit receivables portfolio to Synchrony Bank. Historically, this portfolio was reported as outstanding principal balances, net of any participation interest sold and pro-rata allowances, including unamortized deferred origination costs and estimated collectible interest and fees. Upon approval of our Board of Directors to sell these receivables, the portfolio was reclassified as held for sale and recorded at the lower of cost or fair value, determined on an aggregate basis. In July 2018, we completed the sale of this portfolio to Synchrony Bank, approximately at par, for total consideration of $6.9 billion, which includes cash consideration of $6.5 billion and a long-term receivable in the amount of $426 million, which has been recorded at its present value of $261 million in other assets on our condensed consolidated balance sheet, and is not reflected as a cash item on our condensed consolidated statement of cash flows. Additional expenses incurred due to this transaction resulted in a net loss of approximately $28 million recorded in restructuring and other expenses on our condensed consolidated statement of income. The purchase price is subject to post-closing true-up and certain other adjustments under the terms of the purchase agreement. PayPal also earns a revenue share on the portfolio of consumer receivables owned by Synchrony Bank, which includes both the sold and newly generated receivables. This transaction was accounted for as a true sale based on our determination that it met all the necessary criteria for such accounting. These criteria include legal isolation, ability of the transferee to pledge or exchange the transferred assets without constraint and the transfer of control. We also concluded that our ongoing revenue share arrangement does not invalidate this determination.

Loans and Interest Receivable, Net

Consumer Receivables

We offer credit products to consumers who choose PayPal Credit at checkout. As of September 30, 2018 and December 31, 2017, the outstanding balance in our pool of consumer receivables primarily consisted of loans and interest receivable due from international consumer accounts and was $560 million and $326 million, respectively.

We closely monitor credit quality for our consumer receivables to manage and evaluate our related exposure to credit risk. Credit risk management begins with initial underwriting and continues through to full repayment of a loan. To assess a consumer who requests a loan, we use, among other indicators, internally developed risk models using detailed information from external sources such as credit bureaus where available and internal historical experience including the consumer’s prior repayment history with PayPal Credit products as well as other measures. We use delinquency status and trends to assist in making new and ongoing credit decisions, to adjust our models, to plan our collection practices and strategies and in our determination of our allowance for consumer loans and interest receivable.

The following tables present the delinquency status of the principal amount of consumer loans and interest receivable. The amounts shown below are based on the number of days past the billing date to the consumer. Current represents balances that are within 30 days of the billing date. Amounts as of September 30, 2018 and December 31, 2017 represent loans and interest receivable due from consumer accounts of which approximately 94.6% and 96.0%, respectively, were current.
September 30, 2018
(In millions)
Current
 
30 - 59 Days Past Due
 
60 - 89 Days Past Due
 
90 - 180 Days Past Due
 
Total Past Due
 
Total
$
530

 
$
16

 
$
5

 
$
9

 
$
30

 
$
560


December 31, 2017
(In millions)
Current
 
30 - 59 Days Past Due
 
60 - 89 Days Past Due
 
90 - 180 Days Past Due
 
Total Past Due
 
Total
$
313

 
$
7

 
$
2

 
$
4

 
$
13

 
$
326


We charge off consumer loan receivable balances in the month in which a customer balance becomes 180 days past the payment due date. Bankrupt accounts are charged off within 90 days after receipt of notification of bankruptcy. Loans receivable past the payment due date continue to accrue interest until they are charged off. We record an allowance for loss against the interest and fees receivable.

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PayPal Holdings, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


The following table summarizes the activity in the allowance for consumer loans and interest receivable for the nine months ended September 30, 2018 and 2017:
 
September 30, 2018
 
September 30, 2017(1)
 
Consumer Loans Receivable
Interest Receivable
Total Allowance(2)
  
Consumer Loans Receivable
Interest Receivable
Total Allowance
 
(In millions)
Beginning balance
$
57

$
6

$
63

 
$
265

$
40

$
305

Provisions
50

9

59

 
354

100

454

Charge-offs
(85
)
(12
)
(97
)
 
(315
)
(94
)
(409
)
Recoveries
—

—

—

 
28

—

28

Ending balance
$
22

$
3

$
25

 
$
332

$
46

$
378

(1) Includes allowance related to loans and interest receivable, held for sale portfolio prior to its designation as held for sale.
(2) Beginning balance includes approximately $50 million of U.S. consumer credit receivables that were fully reserved and have been charged off as of September 30, 2018.

The tables above exclude receivables from other consumer credit products of $83 million and $55 million at September 30, 2018 and December 31, 2017, respectively, and allowances of $9 million and $7 million at September 30, 2018 and December 31, 2017, respectively.

The provision for loan losses relating to our consumer loans receivable portfolio is recognized in transaction and loan losses. The provision for interest receivable due to interest and fees earned on our consumer loans receivable portfolio is recognized in net revenues from other value added services as a reduction in revenue.

Merchant Receivables

We offer business financing solutions to certain existing small and medium-sized merchants through our PayPal Working Capital ("PPWC") product and through Swift business loan products. As of September 30, 2018 and December 31, 2017, the total outstanding balance in our pool of merchant loans, advances, interest and fees receivable was $1.6 billion and $1.0 billion, respectively, net of the participation interest sold to an independent chartered financial institution of $65 million and $28 million, respectively.

Through our PPWC product, merchants can borrow a certain percentage of their annual payment volume processed by PayPal and are charged a fixed fee for the loan or advance, which targets an annual percentage rate based on the overall credit assessment of the merchant. Loans and advances are repaid through a fixed percentage of the merchant's future payment volume that PayPal processes. Through our Swift business loan products, we provide merchants with access to short-term business financing based on an evaluation of both the applying business as well as the business owner. Swift business loan repayments are collected by periodic payments until the balance has been satisfied.

The interest or fee is fixed at the time the loan or advance is extended and recognized as deferred revenues included in other current liabilities in our condensed consolidated balance sheet. The fixed interest or fee is amortized to net revenues from other value added services based on the amount repaid over the repayment period. We estimate the repayment period based on the merchant's payment processing history with PayPal, where available. For PPWC product, there is a general requirement that at least 10% of the original amount of the loan or advance plus the fixed fee must be repaid every 90 days. We calculate the repayment rate of the merchant's future payment volume so that repayment of the loan or advance and fixed fee is expected to generally occur within 9 to 12 months from the date of the loan or advance. On a monthly basis, we recalculate the repayment period based on the repayment activity on the receivable. As such, actual repayment periods are dependent on actual merchant payment processing volumes. For Swift business loans, we receive fixed periodic payments over the contractual term of the loan which generally ranges from 3 to 12 months. We actively monitor receivables with repayment periods greater than the original expected or contractual repayment period.


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PayPal Holdings, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

We closely monitor credit quality for our merchant loans and advances that we extend or purchase so that we can evaluate, quantify, and manage our credit risk exposure. To assess a merchant seeking a business financing loan or advance, we use, among other indicators, risk models developed internally which utilize information obtained from multiple data sources, both external and internal data to predict the likelihood of timely and satisfactory repayment by the merchant of the loan or advance amount and the related interest or fixed fee. Primary drivers of the models include the merchant's annual payment volume, payment processing history with PayPal and prior repayment history with the PayPal products where available, elements sourced from consumer credit bureau and business credit bureau reports, and other information obtained during the application process. We use delinquency status and trends to assist in making ongoing credit decisions, to adjust our internal models, to plan our collection practices and strategies and in our determination of our allowance for these loans and advances.

Merchant Receivables Delinquency and Allowance

The following tables present our estimate of the principal amount of merchant loans, advances, interest and fees receivable past their original expected or contractual repayment period.
September 30, 2018(1)
(In millions)
Within Original Expected Repayment Period
 
30 - 59 Days Greater
 
60 - 89 Days Greater
 
90 - 180 Days Greater
 
180+ Days
 
Total Past Original Expected Repayment Period
 
Total
$
1,446

 
$
60

 
$
28

 
$
47

 
$
13

 
$
148

 
$
1,594

(1) Excludes $25 million of loan receivables acquired as part of our acquisition of iZettle in September 2018.

December 31, 2017
(In millions)
Within Original Expected Repayment Period
 
30 - 59 Days Greater
 
60 - 89 Days Greater
 
90 - 180 Days Greater
 
180+ Days
 
Total Past Original Expected Repayment Period
 
Total
$
884

 
$
44

 
$
28

 
$
43

 
$
13

 
$
128

 
$
1,012


The following table summarizes the activity in the allowance for merchant loans and advances, interest and fees receivable, for the nine months ended September 30, 2018 and 2017:
 
September 30, 2018
 
September 30, 2017
 
Merchant Loans and Advances
Interest and Fees Receivable
Total Allowance
  
Merchant Loans and Advances
Interest and Fees Receivable
Total Allowance
 
(In millions)
Beginning balance
$
52

$
7

$
59

 
$
28

$
3

$
31

Provisions
120

18

138

 
42

8

50

Charge-offs
(80
)
(8
)
(88
)
 
(34
)
(6
)
(40
)