Fair Value Measurement of Assets and Liabilities

9 Months Ended

Sep. 30, 2021

Fair Value Disclosures [Abstract]

Fair Value Measurement of Assets and Liabilities

Fair Value Measurement of Assets and Liabilities

The following tables present our financial assets and liabilities measured at fair value on a recurring basis as of the dates indicated (in millions):

	September 30, 2021		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:
Cash and cash equivalents	$	1,244	$	1,244	$	—	$	—
Short-term investments:
Restricted cash	22		22		—		—
Corporate debt securities	3,198		—		3,198		—
Government and agency securities	25		—		25		—
Equity investments with readily determinable fair values	793		793		—		—
Total short-term investments	4,038		815		3,223		—
Equity investment in Adevinta	9,279		9,279		—		—
Derivatives	1,573		—		139		1,434
Long-term investments:
Corporate debt securities	554		—		554		—
Government and agency securities	103		—		103		—
Total long-term investments	657		—		657		—
Total financial assets	$	16,791	$	11,338	$	4,019	$	1,434
Liabilities:
Derivatives	$	9	$	—	$	9	$	—

	December 31, 2020		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:
Cash and cash equivalents	$	1,101	$	890	$	211	$	—
Short-term investments:
Restricted cash	137		137		—		—
Corporate debt securities	2,255		—		2,255		—
Total short-term investments	2,392		137		2,255		—
Derivatives	1,113		—		62		1,051
Long-term investments:
Corporate debt securities	286		—		286		—
Total long-term investments	286		—		286		—
Total financial assets	$	4,892	$	1,027	$	2,814	$	1,051
Liabilities:
Derivatives	$	44	$	—	$	44	$	—

Our financial assets and liabilities are valued using market prices on both active markets (Level 1), less active markets (Level 2) and little or no market activity (Level 3). Level 1 instrument valuations are obtained from real-time quotes for transactions in active exchange markets involving identical assets. 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 typically reflect management’s estimate of assumptions that market participants would use in pricing the asset or liability. We did not have any transfers of financial instruments between valuation levels during the nine months ended September 30, 2021.

The 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 equity prices, interest rate yield curves, option volatility and currency rates. Our warrant, which is accounted for as a derivative instrument, is valued using a Black-Scholes model. Key assumptions used in the valuation include risk-free interest rates; Adyen’s common stock price, equity volatility and common stock outstanding; exercise price; and details specific to the warrant. The value is also probability adjusted for management’s assumptions with respect to vesting of the four tranches which are each subject to meeting processing volume milestone targets. These assumptions and the probability of meeting processing volume milestone targets may have a significant impact on the value of the warrant. Refer to “Note 7 — Derivative Instruments” for further details on our derivative instruments.

Upon completion of the transfer of our Classifieds business to Adevinta we retained an equity investment of 44% in Adevinta valued at $10.8 billion at the close of the acquisition. The investment is accounted for under the fair value option and classified within Level 1 in the fair value hierarchy as the valuation can be obtained from real time quotes in active markets. The fair value of the equity investment is measured based on Adevinta’s closing stock price and prevailing foreign exchange rate at each balance sheet date and the changes in fair value are reflected in interest and other, net in the condensed consolidated statement of income. Refer to “Note 6 — Investments” for further details.

On July 14, 2021, we entered into a share purchase agreement with Permira to sell approximately 125 million of our voting shares in Adevinta for total consideration of $2.25 billion based on an implied purchase price of approximately $18.02. The price represents an approximate 7% discount to the 10-day VWAP of Adevinta shares as of July 12, 2021 and a 5% discount to the 30-day VWAP as of July 12, 2021. In addition, we granted Permira an option, exercisable within 30 days after the date of the purchase agreement, to purchase approximately 10 million additional voting shares for $180 million in consideration based on an implied purchase price of approximately $18.02. On July 29, 2021, Permira exercised the option. At the close of both transactions, our ownership in Adevinta will be reduced to 33%. The transactions are expected to close in the fourth quarter of 2021, subject to the receipt of required regulatory approvals.

Other financial instruments, including accounts receivable and accounts payable, are carried at cost, which approximates their fair value because of the short-term nature of these instruments.

The following tables present a reconciliation of the opening to closing balance of assets measured using significant unobservable inputs (Level 3) as of the dates indicated (in millions):

	September 30, 2021		December 31, 2020
Opening balance at beginning of period	$	1,051	$	281
Change in fair value	383		770
Closing balance at end of period	$	1,434	$	1,051

The following table presents quantitative information about Level 3 significant unobservable inputs used in the fair value measurement of the warrant as of September 30, 2021 (in millions):

	Fair value		Valuation technique	Unobservable Input	Range (weighted average)(1)
Warrant	$	1,434	Black-Scholes and Monte Carlo	Probability of vesting	0.0% - 95.0% (71%)
				Equity volatility	24.5% - 61.7% (42%)

(1) Probability of vesting were weighted by the unadjusted value of the tranches. For volatility, the average represents the arithmetic average of the points within the range and is not weighted by the relative fair value or notional amount.