Investments and Fair Value Measurement

3 Months Ended

Mar. 31, 2020

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, 2019 and March 31, 2020 (in millions):



	As of
	December 31, 2019		March 31, 2020
Classified as short-term investments:
Marketable debt securities ⁽¹⁾:
Commercial paper	148		248
U.S. government and agency securities	93		186
Corporate bonds	199		397
Short-term investments	$	440	$	831

Classified as investments:
Non-marketable equity securities
Didi ⁽²⁾	$	7,953	$	6,299
Other ⁽³⁾	204		272
Non-marketable debt securities
Grab ⁽⁴⁾	2,336		2,109
Other ⁽³⁾	34		7
Investments	$	10,527	$	8,687

⁽¹⁾Excluding marketable debt securities classified as cash equivalents and restricted cash equivalents.

⁽²⁾On August 1, 2016, the Company completed the sale of the Company’s interest in Uber China to Didi and received approximately 52 million shares of Didi’s Series B-1 preferred stock as consideration valued at approximately $6.0 billion at time of transaction.

⁽³⁾These balances include certain investments in securities 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.

⁽⁴⁾Recorded at fair value with changes in fair value recorded in other comprehensive income (loss), net of tax, unless subject to credit loss.

Assets and Liabilities Measured at Fair Value on a Recurring Basis

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, 2019								As of March 31, 2020
	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
Financial Assets
Money market funds	$	5,104	$	—	$	—	$	5,104	$	4,778	$	—	$	—	$	4,778
Commercial paper	—		233		—		233		—		355		—		355
U.S. government and agency securities	—		153		—		153		—		269		—		269
Corporate bonds	—		199		—		199		—		403		—		403
Non-marketable debt securities	—		—		2,370		2,370		—		—		2,116		2,116
Non-marketable equity securities	—		—		98		98		—		—		21		21
Total financial assets	$	5,104	$	585	$	2,468	$	8,157	$	4,778	$	1,027	$	2,137	$	7,942

During the three months ended March 31, 2020, the Company did not make any transfers between the levels of the fair value hierarchy.

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 March 31, 2020 (in millions):



	As of March 31, 2020
	Amortized Cost		Fair Value
Within one year	$	797	$	797
One year through five years	2,514		2,339
Total	$	3,311	$	3,136

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, 2019 and March 31, 2020 (in millions):



	As of December 31, 2019								As of March 31, 2020
	Amortized Cost		Unrealized Gains		Unrealized Losses		Fair Value		Amortized Cost		Unrealized Gains		Unrealized Losses			Allowance for Credit Loss			Fair Value
Commercial paper	$	233	$	—	$	—	$	233	$	355	$	—	$	—		$	—		$	355
U.S. government and agency securities	153		—		—		153		269		—		—			—			269
Corporate bonds	199		—		—		199		405		—		(2		)	—			403
Non-marketable debt securities	2,309		61		—		2,370		2,312		—		(23		)	(173		)	2,116
Total	$	2,894	$	61	$	—	$	2,955	$	3,341	$	—	$	(25	)	$	(173	)	$	3,143

The following table presents information about the allowance for credit losses on debt securities (in millions):



	Non-marketable Debt Securities
Balance as of January 1, 2020	$	—
Impact due to adoption of ASU 2016-13	—
Credit losses on securities for which credit losses were not previously recorded	(173		)
Balance as of March 31, 2020	$	(173	)

The Company measures its cash equivalents and certain investments 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 Company’s Level 3 non-marketable debt securities as of December 31, 2019 and March 31, 2020 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 used in this valuation technique 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 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 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. 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, 2019 and March 31, 2020:

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 months ended March 31, 2019.

At March 31, 2020, the Company determined the fair value of its available-for-sale debt securities in Grab had declined below their amortized cost based on an analysis of the observed valuation declines of Grab’s publicly-traded competitive peer group and representative stock market indices. These observed inputs are considered indicative of changes in the fair value of the Grab securities. Using the analysis, the Company computed a downward market adjustment of 10% that was applied to the valuation derived from Grab’s latest financing transaction which occurred earlier in the first quarter of 2020 and prior to the announcement of COVID-19 as a global pandemic, impacting global demand for ridesharing services. As a result, the carrying value of the investment in Grab was reduced by $230 million; $57 million reduced the previously recognized unrealized gain in other comprehensive income (loss), net of tax, and the remaining $173 million, representing the difference between the fair value and amortized cost of the securities, was recognized as an allowance for credit loss in the condensed consolidated balance sheet and a corresponding credit-related impairment charge recorded to other income (expense), net in the condensed consolidated statement of operations. Due to the significant uncertainty about Grab’s ability to repay the redemption amount of the securities on the redemption date, the amount expected to be collected is considered to be less than the fair value of the securities. Therefore, the entire decline in fair value below amortized cost was considered to reflect a credit-related impairment charge.

The following table presents a reconciliation of the Company’s financial assets measured and recorded at fair value on a recurring basis as of March 31, 2020, using significant unobservable inputs (Level 3) (in millions):



	Non-marketable Debt Securities			Non-marketable Equity Security
Balance as of December 31, 2018	$	2,370		$	—
Total net gains (losses)
Included in earnings	(8		)	11
Included in other comprehensive income (loss)	4			—
Purchases ⁽¹⁾	4			56
Transfers ⁽²⁾	—			31
Balance as of December 31, 2019	2,370			98
Total net gains (losses)
Included in earnings	(27		)	(87		)
Included in other comprehensive income (loss)	(57		)	—
Purchases ⁽¹⁾	3			10
Impairments	(173		)	—
Balance as of March 31, 2020	$	2,116		$	21

⁽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 December 31, 2018 for which the Company elected to apply the fair value option during the year ended December 31, 2019. Management’s key inputs and assumptions used to determine an estimate of fair value for this investment is based on an option-pricing model and price of the underlying security in recent financing transactions.

There is significant uncertainty over the collectability of the contractual interest on the Grab investment and as a result the Company has elected to apply a non-accrual policy to this investment. In determining whether a non-accrual policy is appropriate, the Company considered, among other factors, the reasonable possibility of a Grab initial public offering, the ability of Grab to pay the accumulated interest on all preferred securities on or after the redemption date, and the likelihood of a redemption occurring. If

the Company had recorded accrued interest on the Series G preference shares, $34 million and $36 million of additional interest income would have been recognized for the three months ended March 31, 2019 and 2020, respectively.

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. 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 (referred to as the measurement alternative) or for impairment. Any changes in carrying value are 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 (“CSE”) and option pricing model (“OPM”) methods, 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 months ended March 31, 2019 and 2020. The amounts are based on the selling price of newly issued shares of similar preferred stock to new investors using a hybrid method which applies probabilities to possible scenarios valued using the CSE method, and OPM, which contemplates the rights and preferences of the securities the Company holds.



(In millions)	Three Months Ended March 31,
	2019		2020
Upward adjustments	$	—	$	—
Downward adjustments (including impairment)	—		(1,690		)
Total unrealized gain for non-marketable equity securities	$	—	$	(1,690	)

The Company evaluates its non-marketable equity securities for impairment at each reporting period based on a qualitative assessment that considers various potential impairment indicators. This evaluation consisted of several factors including, but not limited to, an assessment of a significant adverse change in the economic environment, significant adverse changes in the general market condition of the geographies and industries in which the Company’s investees operate, and other publicly available information that affected the value of the its non-marketable equity securities. As a result of the deterioration in economic and market conditions arising from COVID-19, the Company determined an impairment indicator existed as of March 31, 2020 and the fair value of certain investments, primarily its investment in Didi, was less than their carrying value.

To determine the fair value of the Company’s investment in Didi as of March 31, 2020, the Company utilized a hybrid approach, incorporating a CSE method along with an OPM, weighted at 80% and 20%, respectively. The CSE method assumes an if-converted scenario, where the OPM approach allocates equity value to individual securities within the investees’ capital structure based on contractual rights and preferences. The Company computed a range of market adjustments based on observed market valuation declines of Didi’s representative stock market indices and publicly-traded competitive peer group since the latest transaction in similar securities occurred in the prior year and prior to the announcement of COVID-19 as a global pandemic, impacting global demand for ridesharing services. These inputs are considered indicative of changes in the fair value of Didi equity. Market adjustments within the range were applied to the Didi equity valuation derived from the latest financing transaction in similar securities which were then used in the CSE and OPM approaches to obtain the fair value of the Didi securities owned by the Company. A lower adjustment within the range was applied to the enterprise value used in the CSE allocation compared to a higher downward adjustment for purposes of allocating value in the OPM approach. The value adjustment differential was attributable to several factors including possible exit scenarios, as an IPO event would result in higher valuation (due to access to public markets and reduction in cost of capital), reduces valuation uncertainty, and generally assumes market and macro-economic conditions that are comparatively more favorable than an otherwise prolonged stay-private scenario. As a result of the valuation performed, the Company recorded an impairment charge of $1.7 billion in other income (expense), net in the Company’s condensed consolidated statement of operations during the three months ended March 31, 2020.

The following table summarizes information about the significant unobservable inputs used in the valuation for the Company’s investment in Didi as of March 31, 2020:



Fair value method	Key unobservable input
CSE	Market adjustment	(20)%

OPM	Volatility	39%
	Estimated time to liquidity	2.0 years
	Market adjustment	(40)%

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 March 31, 2020.

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, 2019 and March 31, 2020 including cumulative unrealized upward and downward adjustments made to the initial cost basis of the securities (in millions):



	As of
	December 31, 2019		March 31, 2020
Initial cost basis	$	6,075	$	6,256
Upward adjustments	1,984		1,984
Downward adjustments (including impairment)	—		(1,690		)
Total carrying value at the end of the period	$	8,059	$	6,550

- 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

Volatility

Estimated time to liquidity

2.25 - 2.5 years