Investments and Fair Value Measurement

9 Months Ended

Sep. 30, 2019

Note 3 - Investments and Fair Value Measurement

Investments

The Company’s investments on the condensed consolidated balance sheets consisted of the following as of December 31, 2018 and September 30, 2019 (in millions):



	As of
	December 31, 2018		September 30, 2019
Classified as cash and cash equivalents:
Marketable equity securities:
Money market funds	$	268	$	6,039

Classified as restricted cash and cash equivalents
Marketable equity securities:
Money market funds	$	1,237	$	1,595

Classified as investments:
Non-marketable equity securities:
Didi	$	7,953	$	7,953
Other	32		93
Debt securities:
Grab ⁽¹⁾	2,328		2,332
Other ⁽²⁾	42		34
Investments	$	10,355	$	10,412

⁽¹⁾Recorded at fair value with changes in fair value recorded in other comprehensive income (loss), net of tax.

⁽²⁾Recorded at fair value with changes in fair value recorded in earnings due to the election of the fair value option of accounting for financial instruments.

The following table summarizes the amortized cost and fair value of the Company’s debt securities with a stated contractual maturity or redemption date as of December 31, 2018 and September 30, 2019 (in millions):



	As of December 31, 2018				As of September 30, 2019
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
Within one year	$	—	$	—	$	—	$	—
One year through five years	2,275		2,328		2,279		2,332
Total	$	2,275	$	2,328	$	2,279	$	2,332

Assets and Liabilities Measured at Fair Value on a Recurring Basis

The Company defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. In accordance with ASC 820, the Company uses the fair value hierarchy, which prioritizes the inputs used to measure fair value. The hierarchy, as defined below, gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The three levels of the fair value hierarchy are set forth below:


Level 1	Observable inputs such as quoted prices in active markets for identical assets or liabilities.


Level 2	Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities in active markets, quoted prices in markets that are not active or inputs other than the quoted prices that are observable either directly or indirectly for the full term of the assets or liabilities.


Level 3	Unobservable inputs in which there is little or no market data and that are significant to the fair value of the assets or liabilities.

The Company measures its cash equivalents, certain investments, warrants, and derivative financial instruments at fair value. Level 1 instrument valuations are based on quoted market prices of the identical underlying security. 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. Level 3 instrument valuations are valued based on unobservable inputs and other estimation techniques due to the absence of quoted market prices, inherent lack of liquidity and the long-term nature of such financial instruments.

The following table presents the Company’s financial assets and liabilities measured at fair value on a recurring basis based on the three-tier fair value hierarchy (in millions):



	As of December 31, 2018								As of September 30, 2019
	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
Financial Assets
Cash and cash equivalents:
Money market funds	$	268	$	—	$	—	$	268	$	6,039	$	—	$	—	$	6,039
Restricted cash and cash equivalents:
Money market funds	1,237		—		—		1,237		1,595		—		—		1,595
Investments:
Debt securities	—		—		2,370		2,370		—		—		2,366		2,366
Non-marketable equity securities	—		—		—		—		—		—		87		87
Total financial assets	$	1,505	$	—	$	2,370	$	3,875	$	7,634	$	—	$	2,453	$	10,087
Financial Liabilities
Accrued and other current liabilities:
Other	$	—	$	—	$	9	$	9	$	—	$	—	$	27	$	27
Other long-term liabilities:
Warrants	—		—		52		52		—		—		—		—
Embedded derivatives	—		—		2,018		2,018		—		—		—		—
Total financial liabilities	$	—	$	—	$	2,079	$	2,079	$	—	$	—	$	27	$	27

During the nine months ended September 30, 2019, the Company did not make any transfers between the levels of the fair value hierarchy.

The following table summarizes the amortized cost, unrealized gains and losses, and fair value of the Company’s debt securities at fair value on a recurring basis as of December 31, 2018 and September 30, 2019 (in millions):



	As of December 31, 2018								As of September 30, 2019
	Amortized Cost		Unrealized Gains		Unrealized Losses		Fair Value		Amortized Cost		Unrealized Gains		Unrealized Losses		Fair Value
Investments:
Debt securities	$	2,305	$	65	$	—	$	2,370	$	2,309	$	57	$	—	$	2,366
Total	$	2,305	$	65	$	—	$	2,370	$	2,309	$	57	$	—	$	2,366

The Company’s Level 3 debt securities as of December 31, 2018 and September 30, 2019 primarily consist of redeemable preferred stock investments in privately held companies without readily determinable fair values.

Depending on the investee’s financing activity in a reporting period, management’s estimate of fair value may be primarily derived from the investee’s financing transactions, such as the issuance of preferred stock to new investors. The price in these transactions generally provides the best indication of the enterprise value of the investee. Additionally, based on the timing, volume, and other characteristics of the transaction, the Company may supplement this information by using other valuation techniques, including the guideline public company approach.

The guideline public company approach relies on publicly available market data of comparable companies and uses comparative valuation multiples of the investee’s revenue (actual and forecasted), and therefore, unobservable data primarily consists of short-term revenue projections.

Once the fair value of the investee is estimated, an option pricing model (“OPM”) is employed to allocate value to various classes of securities of the investee, including the class owned by the Company. The model involves making key assumptions around the investees’ expected time to liquidity and volatility.

An increase or decrease in any of the unobservable inputs in isolation, such as the security price in a significant financing transaction of the investee, could result in a material increase or decrease in the Company’s estimate of fair value. Other key unobservable inputs, including short-term revenue projections, time to liquidity, and volatility are less sensitive to the valuation in the respective reporting periods, as a result of the primary weighting on the investee’s financing transactions during 2018 and 2019. In the future, depending on the weight of evidence and valuation approaches used, these or other inputs may have a more significant impact on the Company’s estimate of fair value.

The following table summarizes information about the significant unobservable inputs used in the fair value measurement for the Company’s investment in Grab as of December 31, 2018 and September 30, 2019:

The Company determines realized gains or losses on the sale of equity and debt securities on a specific identification method. The Company did not recognize any other-than-temporary impairment losses during three and nine months ended September 30, 2018 and 2019.

The following table presents a reconciliation of the Company’s financial assets measured and recorded at fair value on a recurring basis as of September 30, 2019, using significant unobservable inputs (Level 3) (in millions):



	Debt Securities			Non-marketable Equity Security
Balance as of December 31, 2018	$	2,370		$	—
Total net gains (losses)
Included in earnings	(8		)	(12		)
Included in other comprehensive income (loss)	—			—
Purchases ⁽¹⁾	4			11
Transfers ⁽²⁾	—			88
Balance as of September 30, 2019	$	2,366		$	87

⁽¹⁾ Purchases in non–marketable equity security include warrants to purchase shares of a private company that vest as certain performance criteria are met during the period.

⁽²⁾ Transfers include a non-marketable equity security that was previously measured at fair value on a non-recurring basis as of June 30, 2019 for which the Company elected to apply the fair value option during the three months ended September 30, 2019. This includes $22 million of gains included in earnings and $35 million of warrants vested during the six months ended June 30, 2019. Management’s key inputs and assumptions used to determine an estimate of fair value for this investment is based on an OPM and price of the underlying security in recent financing transactions.

The following table presents a reconciliation of the Company’s financial liabilities measured at fair value as of September 30, 2019 using significant unobservable inputs (Level 3), and the change in fair value recorded in other income (expense), net in the condensed consolidated statements of operations (in millions):



	Warrants			Convertible Debt Embedded Derivative
Balance as of December 31, 2018	$	52		$	2,018
Vesting of share warrants	1			—
Exercise of vested share warrants	(53		)	—
Change in fair value	—			(58		)
Settlement of derivative liability	—			(1,960		)
Balance as of September 30, 2019	$	—		$	—

Convertible Debt Embedded Derivative

Convertible debt embedded derivatives originated from the issuance of the 2021 convertible notes and 2022 convertible notes (collectively the “Convertible Notes”) during 2015. Refer to Note 8 - Long-Term Debt and Revolving Credit Arrangements for further information. The fair value of the embedded derivatives was computed as the difference between the estimated value of the Convertible Notes with and without the Qualified Initial Public Offering (“QIPO”) Conversion Option (“QIPO Conversion Option”). The fair

value of the Convertible Notes with and without the QIPO Conversion Option was estimated utilizing a discounted cash flow model to discount the expected payoffs at various potential QIPO dates to the valuation date. The key inputs to the valuation model included the probability of a QIPO occurring at various times, which was estimated to be 100% cumulatively by 2019 and a discount yield that was derived by the credit spread based on the average of the option-adjusted spreads of comparable instruments plus risk-free rates. Fair value measurements are highly sensitive to changes in these inputs; significant changes in these inputs would result in a significantly higher or lower fair value. No value was attributed to other embedded features as they are triggered by events with a remote probability of occurrence. Upon closing of the IPO, holders of the 2021 Convertible Notes and the 2022 Convertible Notes elected to convert all outstanding notes into 94 million shares of common stock. Refer to Note 1 - Basis of Presentation and Summary of Significant Accounting Policies for further information.

Warrant Liabilities

In February 2016, the Company issued two warrants to an investor advisor to purchase up to 205,034 shares and 820,138 shares of the Company’s Series G redeemable convertible preferred stock at an exercise price of $0.01 per share in exchange for advisory services. The warrants were liability-classified due to the contingent redemption features in the underlying preferred stock and were consequently measured at their fair value of $45 million as of December 31, 2018. The vested shares were exercised during the first quarter of 2019, and the Company reclassified the $45 million fair value of the vested shares to Series G redeemable convertible preferred stock. Upon closing of the IPO, the Series G redeemable convertible preferred stock were automatically converted to shares of common stock.

Assets Measured at Fair Value on a Non-Recurring Basis

The Company’s non-financial assets, such as goodwill, intangible assets and property and equipment are adjusted to fair value when an impairment charge is recognized. Such fair value measurements are based predominately on Level 3 inputs.

Non-Marketable Equity Securities

The Company’s non-marketable equity securities are investments in privately held companies without readily determinable fair values and primarily relate to its investment in Didi. On January 1, 2018, the Company adopted ASU 2016-01, in which the carrying value of its non-marketable equity securities are adjusted based on price changes from observable transactions of identical or similar securities of the same issuer or for impairment (referred to as the measurement alternative). Any changes in carrying value is recorded within other income (expense), net in the condensed consolidated statements of operations. Non-marketable equity securities are classified within Level 3 in the fair value hierarchy because the Company estimates the fair value of these securities based on valuation methods, including the common stock equivalent method, using the transaction price of similar securities issued by the investee adjusted for contractual rights and obligations of the securities it holds.

The following is a summary of unrealized gains and losses from remeasurement (referred to as upward or downward adjustments) recorded in other income (expense), net in the condensed consolidated statements of operations, and included as adjustments to the carrying value of non-marketable equity securities held during the three and nine months ended September 30, 2018 and 2019 based on the selling price of newly issued shares of similar preferred stock to new investors using the common stock equivalent valuation method and adjusted for any applicable differences in conversion rights (in millions):



	Three Months Ended September 30,				Nine Months Ended September 30,
	2018		2019		2018		2019
Upward adjustments	$	—	$	—	$	1,984	$	22
Downward adjustments (including impairment)	—		—		—		—
Total unrealized gain for non-marketable equity securities	$	—	$	—	$	1,984	$	22

The Company did not record any realized gains or losses for the Company’s non-marketable equity securities measured at fair value on a non-recurring basis as of September 30, 2019.

The following table summarizes the total carrying value of the Company’s non-marketable equity securities measured at fair value on a non-recurring basis held as of December 31, 2018 and September 30, 2019 including cumulative unrealized upward and downward adjustments made to the initial cost basis of the securities (in millions):



	As of
	December 31, 2018		September 30, 2019
Initial cost basis	$	6,001	$	5,975
Upward adjustments	1,984		1,984
Downward adjustments (including impairment)	—		—
Total carrying value at the end of the period	$	7,985	$	7,959

- Definition

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

+ References + Details

Fair value method

Relative weighting

Key unobservable input

Financing transactions

Transaction price per share