NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1.
Nature of Operations and Summary of Significant Accounting Policies
Nature of Operations
Google was incorporated in California in September 1998 and re-incorporated in the State of Delaware in August 2003. In 2015, we implemented a holding company reorganization, and as a result, Alphabet Inc. (Alphabet) became the successor issuer to Google.
We generate revenues primarily by delivering relevant, cost-effective online advertising.
Basis of Consolidation
The consolidated financial statements of Alphabet include the accounts of Alphabet and entities consolidated under the variable interest and voting models. All intercompany balances and transactions have been eliminated.
Use of Estimates
Preparation of consolidated financial statements in conformity with generally accepted accounting principles in the United States (GAAP) requires us to make estimates and assumptions that affect the amounts reported and disclosed in the financial statements and the accompanying notes. Actual results could differ materially from these estimates. On an ongoing basis, we evaluate our estimates, including those related to the accounts receivable and sales allowances, fair values of financial instruments, intangible assets and goodwill, useful lives of intangible assets and property and equipment, income taxes, and contingent liabilities, among others. We base our estimates on assumptions, both historical and forward looking, that are believed to be reasonable, the results of which form the basis for making judgments about the carrying values of assets and liabilities.
Revenue Recognition
We recognize revenues when we transfer control of promised goods or services to our customers in an amount that reflects the consideration to which we expect to be entitled to in exchange for those goods or services.
See Note 2 for further discussion on Revenues.
Cost of Revenues
Cost of revenues consists of TAC and other costs of revenues.
TAC represents the amounts paid to Google Network Members primarily for ads displayed on their properties and amounts paid to our distribution partners who make available our search access points and services. Our distribution partners include browser providers, mobile carriers, original equipment manufacturers, and software developers.
Other costs of revenues (which is the cost of revenues excluding TAC) include the following:
|
|
•
|
Amortization of certain intangible assets;
|
|
|
•
|
Content acquisition costs primarily related to payments to content providers from whom we license video and other content for distribution on YouTube and Google Play (we pay fees to these content providers based on revenues generated or a flat fee);
|
|
|
•
|
Credit card and other transaction fees related to processing customer transactions;
|
|
|
•
|
Expenses associated with our data centers and other operations (including bandwidth, compensation expense (including SBC), depreciation, energy, and other equipment costs); and
|
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|
•
|
Inventory related costs for hardware we sell.
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Stock-based Compensation
Stock-based compensation primarily consists of Alphabet restricted stock units (RSUs). RSUs are equity classified and measured at the fair market value of the underlying stock at the grant date. We recognize RSU expense using the straight-line attribution method over the requisite service period and account for forfeitures as they occur.
For RSUs, shares are issued on the vesting dates net of the applicable statutory tax withholding to be paid by us on behalf of our employees. As a result, fewer shares are issued than the number of RSUs outstanding. We record a liability for the tax withholding to be paid by us as a reduction to additional paid-in capital.
Additionally, stock-based compensation includes other types of stock-based awards that may be settled in the stock of our subsidiaries or in cash. Certain awards are liability classified and are remeasured at fair value through settlement.
Performance Fees
We have compensation arrangements with payouts based on investment returns. We recognize compensation expense based on the estimated payouts. The amounts are recorded in general and administrative expenses and were not material for the years ended December 31,
2015
,
2016
, and
2017
.
Certain Risks and Concentrations
Our revenues are primarily derived from online advertising, the market for which is highly competitive and rapidly changing. In addition, our revenues are generated from a multitude of vertical market segments in countries around the world. Significant changes in this industry or changes in customer buying or advertiser spending behavior could adversely affect our operating results.
We are subject to concentrations of credit risk principally from cash and cash equivalents, marketable securities, foreign exchange contracts, and accounts receivable. Cash equivalents and marketable securities consist primarily of time deposits, money market and other funds, highly liquid debt instruments of the U.S. government and its agencies, debt instruments issued by foreign governments, debt instruments issued by municipalities in the U.S., corporate debt securities, mortgage-backed securities, and asset-backed securities. Foreign exchange contracts are transacted with various financial institutions with high credit standing. Accounts receivable are typically unsecured and are derived from revenues earned from customers located around the world. We perform ongoing evaluations to determine customer credit and we limit the amount of credit we extend. We generally do not require collateral from our customers. We maintain reserves for estimated credit losses and these losses have generally been within our expectations.
No
individual customer or groups of affiliated customers represented more than
10%
of our revenues in
2015
,
2016
, or
2017
. In
2015
,
2016
, and
2017
, we generated approximately
46%
,
47%
, and
47%
of our revenues, respectively, from customers based in the U.S. See
Note 2
for further details.
Fair Value of Financial Instruments
Our financial assets and liabilities that are measured at fair value on a recurring basis include cash equivalents, marketable securities, derivative contracts, and non-marketable debt securities. Our financial assets that are measured at fair value on a nonrecurring basis when impairment is identified or assets are held for sale include long-lived assets and non-marketable equity securities. Other financial assets and liabilities are carried at cost with fair value disclosed, if required.
Fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that is determined based on assumptions that market participants would use in pricing an asset or a liability. Assets and liabilities recorded at fair value are measured and classified in accordance with a three-tier fair value hierarchy based on the observability of the inputs available in the market used to measure fair value:
Level 1 - Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.
Level 2 - Include other inputs that are based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant inputs are observable in the market or can be derived from observable market data. Where applicable, these models project future cash flows and discount the future amounts to a present value using market-based observable inputs including interest rate curves, foreign exchange rates, and credit ratings.
Level 3 - Unobservable inputs that are supported by little or no market activities.
The fair value hierarchy requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.
Cash, Cash Equivalents, and Marketable Securities
We invest all excess cash primarily in debt securities including those of the U.S. government and its agencies, corporate debt securities, mortgage-backed securities, money market and other funds, municipal securities, time deposits, asset backed securities, and debt instruments issued by foreign governments.
We classify all investments that are readily convertible to known amounts of cash and have stated maturities of three months or less from the date of purchase as cash equivalents and those with stated maturities of greater than three months as marketable securities.
We determine the appropriate classification of our investments in marketable securities at the time of purchase and reevaluate such designation at each balance sheet date. We have classified and accounted for our marketable securities as available-for-sale. After consideration of our risk versus reward objectives, as well as our liquidity requirements, we may sell these securities prior to their stated maturities. As we view these securities as available to support current operations, we classify highly liquid securities with maturities beyond 12 months as current assets under the caption marketable securities in the Consolidated Balance Sheets. We carry these securities at fair value, and report the unrealized gains and losses, net of taxes, as a component of stockholders’ equity, except for unrealized losses determined to be other-than-temporary, which we record within other income (expense), net. We determine any realized gains or losses on the sale of marketable securities on a specific identification method, and we record such gains and losses as a component of other income (expense), net.
Non-Marketable Investments
We account for non-marketable equity investments either under the equity or cost method. Investments through which we exercise significant influence but do not have control over the investee are accounted for under the equity method. Investments through which we are not able to exercise significant influence over the investee are accounted for under the cost method. We classify non-marketable investments as non-current assets on the Consolidated Balance Sheet as those investments do not have stated contractual maturity dates.
We account for our non-marketable investments that meet the definition of a debt security as available-for-sale securities.
Variable Interest Entities
We determine at the inception of each arrangement whether an entity in which we have made an investment or in which we have other variable interests in is considered a Variable Interest Entity (VIE). We consolidate VIEs when we are deemed to be the primary beneficiary. The primary beneficiary of a VIE is the party that meets both of the following criteria: (1) has the power to make decisions that most significantly affect the economic performance of the VIE; and (2) has the obligation to absorb losses or the right to receive benefits that in either case could potentially be significant to the VIE. Periodically, we determine whether any changes in our interest or relationship with the entity impact our determination of whether the entity is still a VIE and, if so, whether we are the primary beneficiary. If we are not deemed to be the primary beneficiary in a VIE, we account for the investment or other variable interests in a VIE in accordance with applicable GAAP.
Impairment of Investments
We periodically review our investments for impairment. If we conclude that any of these investments are impaired, we determine whether such impairment is other-than-temporary. Factors we consider to make such determination include the duration and severity of the impairment, the reason for the decline in value and the potential recovery period and our intent to sell. For debt securities, we also consider whether (1) it is more likely than not that we will be required to sell the security before recovery of its amortized cost basis, and (2) the amortized cost basis cannot be recovered as a result of credit losses. If any impairment is considered other-than-temporary, we will write down the asset to its fair value and record the corresponding charge as other income (expense), net.
Accounts Receivable
We record accounts receivable at the invoiced amount. We maintain an allowance for doubtful accounts to reserve for potentially uncollectible receivables. We review the accounts receivable by amounts due by customers which are past due to identify specific customers with known disputes or collectability issues. In determining the amount of the reserve, we make judgments about the creditworthiness of significant customers based on ongoing credit evaluations. We also maintain a sales allowance to reserve for potential credits issued to customers. We determine the amount of the reserve based on historical credits issued.
Property and Equipment
We account for property and equipment at cost less accumulated depreciation. We compute depreciation using the straight-line method over the estimated useful lives of the assets. We depreciate buildings over periods up to
25
years. We generally depreciate information technology assets over periods up to
7
years. We depreciate leasehold improvements over the shorter of the remaining lease term or the estimated useful lives of the assets. Construction in progress is the construction or development of property and equipment that have not yet been placed in service for
our intended use. Depreciation for equipment, buildings, and leasehold improvements commences once they are ready for our intended use. Land is not depreciated.
Inventory
Inventory consists primarily of finished goods and is stated at the lower of cost and net realizable value. Cost is computed using the first-in, first-out method.
Software Development Costs
We expense software development costs, including costs to develop software products or the software component of products to be sold, leased, or marketed to external users, before technological feasibility is reached. Technological feasibility is typically reached shortly before the release of such products and as a result, development costs that meet the criteria for capitalization were not material for the periods presented.
Software development costs also include costs to develop software to be used solely to meet internal needs and cloud based applications used to deliver our services. We capitalize development costs related to these software applications once the preliminary project stage is complete and it is probable that the project will be completed and the software will be used to perform the function intended. Costs capitalized for developing such software applications were not material for the periods presented.
Business Combinations
We include the results of operations of the businesses that we acquire as of the acquisition date. We allocate the purchase price of our acquisitions to the assets acquired and liabilities assumed based on their estimated fair values. The excess of the purchase price over the fair values of these identifiable assets and liabilities is recorded as goodwill. Acquisition-related expenses are recognized separately from the business combination and are expensed as incurred.
Long-Lived Assets, Goodwill and Other Acquired Intangible Assets
We review property and equipment, long-term prepayments and intangible assets, excluding goodwill, for impairment when events or changes in circumstances indicate the carrying amount may not be recoverable. We measure recoverability of these assets by comparing the carrying amounts to the future undiscounted cash flows that the assets or the asset group are expected to generate. If the carrying value of the assets are not recoverable, the impairment recognized is measured as the amount by which the carrying value of the asset exceeds its fair value. Intangible asset impairments were not material in 2015, 2016, or 2017.
We allocate goodwill to reporting units based on the expected benefit from the business combination. We evaluate our reporting units when changes in our operating structure occur, and if necessary, reassign goodwill using a relative fair value allocation approach. We test our goodwill for impairment at least annually, or more frequently if events or changes in circumstances indicate that the asset may be impaired. No goodwill impairment occurred in 2015, 2016, or 2017.
Intangible assets with definite lives are amortized over their estimated useful lives. We amortize intangible assets on a straight-line basis with definite lives over periods ranging from
one
to
twelve
years.
Income Taxes
We account for income taxes using the asset and liability method, under which we recognize the amount of taxes payable or refundable for the current year and deferred tax assets and liabilities for the future tax consequences of events that have been recognized in our financial statements or tax returns. We measure current and deferred tax assets and liabilities based on provisions of enacted tax law. We evaluate the realization of our deferred tax assets based on all available evidence and establish a valuation allowance to reduce deferred tax assets when it is more likely than not that they will not be realized.
We recognize the financial statement effects of a tax position when it is more likely than not that, based on technical merits, the position will be sustained upon examination. The tax benefits of the position recognized in the financial statements are then measured based on the largest amount of benefit that is greater than 50% likely to be realized upon settlement with a taxing authority. In addition, we recognize interest and penalties related to unrecognized tax benefits as a component of the income tax provision.
Foreign Currency
Generally, the functional currency of our international subsidiaries is the local currency. We translate the financial statements of these subsidiaries to U.S. dollars using month-end exchange rates for assets and liabilities, and average rates for the annual period derived from month-end exchange rates for revenues, costs, and expenses. We record
translation gains and losses in accumulated other comprehensive income as a component of stockholders’ equity. We reflect net foreign exchange transaction gains and losses resulting from the conversion of the transaction currency to functional currency as a component of foreign currency exchange losses in other income (expense), net.
Advertising and Promotional Expenses
We expense advertising and promotional costs in the period in which they are incurred. For the years ended
December 31, 2015
,
2016
and
2017
, advertising and promotional expenses totaled approximately
$3.2 billion
,
$3.9 billion
, and
$5.1 billion
, respectively.
Recent Accounting Pronouncements
Recently issued accounting pronouncements not yet adopted
In January 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update No. 2016-01 (ASU 2016-01) "Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities." ASU 2016-01 amends various aspects of the recognition, measurement, presentation, and disclosure of financial instruments. The most significant impact to our consolidated financial statements relates to the recognition and measurement of equity investments at fair value in our consolidated statements of income. We have elected to use the measurement alternative, defined as cost, less impairments, adjusted by observable price changes. We anticipate that the adoption of ASU 2016-01 will increase the volatility of our other income (expense), net, as a result of the remeasurement of our equity securities upon the occurrence of observable price changes and impairments. We will adopt ASU 2016-01 effective January 1, 2018.
In February 2016, the FASB issued Accounting Standards Update No. 2016-02 (Topic 842) "Leases." Topic 842 supersedes the lease recognition requirements in Accounting Standards Codification (ASC) Topic 840, "Leases." Under Topic 842, lessees are required to recognize assets and liabilities on the balance sheet for most leases and provide enhanced disclosures. Leases will continue to be classified as either finance or operating. As currently issued, entities are required to use a modified retrospective approach for leases that exist or are entered into after the beginning of the earliest comparative period in the financial statements. There are additional optional practical expedients that an entity may elect to apply. We anticipate that the adoption of Topic 842 will materially affect our Consolidated Balance Sheets. We are in the process of implementing changes to our systems and processes in conjunction with our review of existing lease agreements. We will adopt Topic 842 effective January 1, 2019 and expect to elect certain available transitional practical expedients.
In June 2016, the FASB issued Accounting Standards Update No. 2016-13 (ASU 2016-13) "Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments" which requires the measurement and recognition of expected credit losses for financial assets held at amortized cost. ASU 2016-13 replaces the existing incurred loss impairment model with an expected loss methodology, which will result in more timely recognition of credit losses. ASU 2016-13 is effective for annual reporting periods, and interim periods within those years, beginning after December 15, 2019. We are currently in the process of evaluating the impact of the adoption of ASU 2016-13 on our consolidated financial statements.
In October 2016, the FASB issued Accounting Standards Update No. 2016-16 (ASU 2016-16) "Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other than Inventory." ASU 2016-16 generally accelerates the recognition of income tax consequences for asset transfers between entities under common control. Entities are required to adopt using a modified retrospective approach with a cumulative adjustment to opening retained earnings in the year of adoption for previously unrecognized income tax expense. We anticipate a retained earnings adjustment of approximately
$700 million
upon adoption related to the unrecognized income tax effects of asset transfers that occurred prior to adoption. We will adopt ASU 2016-16 effective January 1, 2018.
In January 2017, the FASB issued Accounting Standards Update No. 2017-04 (ASU 2017-04) “Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment.” ASU 2017-04 eliminates step two of the goodwill impairment test and specifies that goodwill impairment should be measured by comparing the fair value of a reporting unit with its carrying amount. Additionally, the amount of goodwill allocated to each reporting unit with a zero or negative carrying amount of net assets should be disclosed. ASU 2017-04 is effective for annual or interim goodwill impairment tests performed in fiscal years beginning after December 15, 2019; early adoption is permitted. We currently do not anticipate that the adoption of ASU 2017-04 will have a material impact on our consolidated financial statements.
Recently adopted accounting pronouncements
In May 2014, the FASB issued Accounting Standards Update No. 2014-09 (Topic 606) "Revenue from Contracts with Customers." Topic 606 supersedes the revenue recognition requirements in Topic 605 “Revenue
Recognition” (Topic 605), and requires entities to recognize revenues when control of the promised goods or services is transferred to customers at an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services. We adopted Topic 606 as of January 1, 2017 using the modified retrospective transition method. See
Note 2
for further details.
In January 2017, the FASB issued Accounting Standards Update No. 2017-01 (ASU 2017-01) “Business Combinations (Topic 805): Clarifying the Definition of a Business.” ASU 2017-01 provides guidance to evaluate whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. If substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single asset or a group of similar assets, the assets acquired (or disposed of) are not considered a business. We adopted ASU 2017-01 as of January 1, 2017 on a prospective basis and there was no material impact to our consolidated financial statements.
Prior Period Reclassifications
Certain amounts in prior periods have been reclassified to conform with current period presentation.
Note 2.
Revenues
Adoption of ASC Topic 606, "Revenue from Contracts with Customers"
On
January 1, 2017
, we adopted Topic 606 using the modified retrospective method applied to those contracts which were not completed as of
January 1, 2017
. Results for reporting periods beginning after
January 1, 2017
are presented under Topic 606, while prior period amounts are not adjusted and continue to be reported in accordance with our historic accounting under Topic 605.
We recorded a net reduction to opening retained earnings of
$15 million
, net of tax, as of
January 1, 2017
due to the cumulative impact of adopting Topic 606, with the impact primarily related to our non-advertising revenues. The impact to revenues as a result of applying Topic 606 was an increase of
$34 million
for the
twelve months ended December 31, 2017
.
Revenue Recognition
Revenues are recognized when control of the promised goods or services is transferred to our customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services.
The following table presents our revenues disaggregated by revenue source (in millions). Sales and usage-based taxes are excluded from revenues.
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|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve Months Ended
|
|
December 31,
|
|
2015
(1)
|
|
2016
(1)
|
|
2017
|
Google properties
|
$
|
52,357
|
|
|
$
|
63,785
|
|
|
$
|
77,788
|
|
Google Network Members' properties
|
15,033
|
|
|
15,598
|
|
|
17,587
|
|
Google advertising revenues
|
67,390
|
|
|
79,383
|
|
|
95,375
|
|
Google other revenues
|
7,154
|
|
|
10,080
|
|
|
14,277
|
|
Other Bets revenues
|
445
|
|
|
809
|
|
|
1,203
|
|
Total revenues
(2)
|
$
|
74,989
|
|
|
$
|
90,272
|
|
|
$
|
110,855
|
|
|
|
(1)
|
As noted above, prior period amounts have not been adjusted under the modified retrospective method.
|
|
|
(2)
|
Revenues include hedging gains (losses) of
$1.4 billion
,
$539 million
, and
$(169) million
for the years ended
December 31, 2015
,
2016
, and
2017
, respectively, which do not represent revenues recognized from contracts with customers.
|
The following table presents our revenues disaggregated by geography, based on the billing addresses of our customers (in millions):
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|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve Months Ended
|
|
December 31,
|
|
2015
|
|
2016
|
|
2017
|
United States
|
$
|
34,810
|
|
|
$
|
42,781
|
|
|
$
|
52,449
|
|
EMEA
(1)
|
26,368
|
|
|
30,304
|
|
|
36,046
|
|
APAC
(1)
|
9,887
|
|
|
12,559
|
|
|
16,235
|
|
Other Americas
(1)
|
3,924
|
|
|
4,628
|
|
|
6,125
|
|
Total revenues
(2)
|
$
|
74,989
|
|
|
$
|
90,272
|
|
|
$
|
110,855
|
|
|
|
(1)
|
Regions represent Europe, the Middle East, and Africa (EMEA); Asia-Pacific (APAC); and Canada and Latin America (Other Americas).
|
|
|
(2)
|
Revenues include hedging gains (losses) for the the years ended
December 31, 2015
,
2016
, and
2017
.
|
Advertising Revenues
We generate revenues primarily by delivering advertising on Google properties and Google Network Members’ properties.
Google properties revenues consist primarily of advertising revenues generated on Google.com, the Google Search app, and other Google owned and operated properties like Gmail, Google Maps, Google Play, and YouTube.
Google Network Members’ properties revenues consist primarily of advertising revenues generated on Google Network Members’ properties.
Our customers generally purchase advertising inventory through AdWords, DoubleClick AdExchange, and DoubleClick Bid Manager, among others.
Most of our customers pay us on a cost-per-click basis (CPC), which means that an advertiser pays us only when a user clicks on an ad on Google properties or Google Network Members' properties or views certain YouTube engagement ads. For these customers, we recognize revenue each time a user clicks on the ad or when a user views the ad for a specified period of time.
We also offer advertising on other bases such as cost-per-impression (CPM), which means an advertiser pays us based on the number of times their ads are displayed on Google properties or Google Network Members’ properties. For these customers, we recognize revenue each time an ad is displayed.
Certain customers may receive cash-based incentives or credits, which are accounted for as variable consideration. We estimate these amounts based on the expected amount to be provided to customers and reduce revenues recognized. We believe that there will not be significant changes to our estimates of variable consideration.
For ads placed on Google Network Members’ properties, we evaluate whether we are the principal (i.e., report revenues on a gross basis) or agent (i.e., report revenues on a net basis). Generally, we report advertising revenues for ads placed on Google Network Members’ properties on a gross basis, that is, the amounts billed to our customers are recorded as revenues, and amounts paid to Google Network Members are recorded as cost of revenues. Where we are the principal, we control the advertising inventory before it is transferred to our customers. Our control is evidenced by our sole ability to monetize the advertising inventory before it is transferred to our customers, and is further supported by us being primarily responsible to our customers and having a level of discretion in establishing pricing.
Other Revenues
Google other revenues and Other Bets revenues consist primarily of revenues from:
|
|
•
|
Apps, in-app purchases, and digital content in the Google Play store;
|
|
|
•
|
Google Cloud offerings;
|
|
|
•
|
Other miscellaneous products and services.
|
As it relates to Google other revenues, the most significant judgment is determining whether we are the principal or agent for app sales and in-app purchases through the Google Play store. We report revenues from these transactions on a net basis because our performance obligation is to facilitate a transaction between app developers and end users,
for which we earn a commission. Consequently, the portion of the gross amount billed to end users that is remitted to app developers is not reflected as revenues.
Arrangements with Multiple Performance Obligations
Our contracts with customers may include multiple performance obligations. For such arrangements, we allocate revenues to each performance obligation based on its relative standalone selling price. We generally determine standalone selling prices based on the prices charged to customers or using expected cost plus margin.
Deferred Revenues
We record deferred revenues when cash payments are received or due in advance of our performance, including amounts which are refundable. The
increase
in the deferred revenue balance for the
twelve months ended
December 31, 2017
is primarily driven by cash payments received or due in advance of satisfying our performance obligations, offset by
$985 million
of revenues recognized that were included in the deferred revenue balance as of
December 31, 2016
.
Our payment terms vary by the type and location of our customer and the products or services offered. The term between invoicing and when payment is due is not significant. For certain products or services and customer types, we require payment before the products or services are delivered to the customer.
Practical Expedients and Exemptions
We generally expense sales commissions when incurred because the amortization period would have been one year or less. These costs are recorded within sales and marketing expenses.
We do not disclose the value of unsatisfied performance obligations for (i) contracts with an original expected length of one year or less and (ii) contracts for which we recognize revenue at the amount to which we have the right to invoice for services performed.
Note 3.
Financial Instruments
We classify our cash equivalents and marketable securities within Level 1 or Level 2 in the fair value hierarchy because we use quoted market prices or alternative pricing sources and models utilizing market observable inputs to determine their fair value. We classify our foreign currency and interest rate derivative contracts primarily within Level 2 in the fair value hierarchy as the valuation inputs are based on quoted prices and market observable data of similar instruments.
Cash, Cash Equivalents, and Marketable Securities
The following tables summarize our cash, cash equivalents and marketable securities by significant investment categories as of
December 31, 2016
and
2017
(in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2016
|
|
Adjusted
Cost
|
|
Gross
Unrealized
Gains
|
|
Gross
Unrealized
Losses
|
|
Fair
Value
|
|
Cash and
Cash
Equivalents
|
|
Marketable
Securities
|
Cash
|
$
|
7,078
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
7,078
|
|
|
$
|
7,078
|
|
|
$
|
0
|
|
Level 1:
|
|
|
|
|
|
|
|
|
|
|
|
Money market and other funds
|
4,783
|
|
|
0
|
|
|
0
|
|
|
4,783
|
|
|
4,783
|
|
|
0
|
|
U.S. government notes
|
38,454
|
|
|
46
|
|
|
(215
|
)
|
|
38,285
|
|
|
613
|
|
|
37,672
|
|
Marketable equity securities
|
160
|
|
|
133
|
|
|
0
|
|
|
293
|
|
|
0
|
|
|
293
|
|
|
43,397
|
|
|
179
|
|
|
(215
|
)
|
|
43,361
|
|
|
5,396
|
|
|
37,965
|
|
Level 2:
|
|
|
|
|
|
|
|
|
|
|
|
Time deposits
(1)
|
142
|
|
|
0
|
|
|
0
|
|
|
142
|
|
|
140
|
|
|
2
|
|
Mutual funds
(2)
|
204
|
|
|
7
|
|
|
0
|
|
|
211
|
|
|
0
|
|
|
211
|
|
U.S. government agencies
|
1,826
|
|
|
0
|
|
|
(11
|
)
|
|
1,815
|
|
|
300
|
|
|
1,515
|
|
Foreign government bonds
|
2,345
|
|
|
18
|
|
|
(7
|
)
|
|
2,356
|
|
|
0
|
|
|
2,356
|
|
Municipal securities
|
4,757
|
|
|
15
|
|
|
(65
|
)
|
|
4,707
|
|
|
2
|
|
|
4,705
|
|
Corporate debt securities
|
12,993
|
|
|
114
|
|
|
(116
|
)
|
|
12,991
|
|
|
2
|
|
|
12,989
|
|
Mortgage-backed securities
|
12,006
|
|
|
26
|
|
|
(216
|
)
|
|
11,816
|
|
|
0
|
|
|
11,816
|
|
Asset-backed securities
|
1,855
|
|
|
2
|
|
|
(1
|
)
|
|
1,856
|
|
|
0
|
|
|
1,856
|
|
|
36,128
|
|
|
182
|
|
|
(416
|
)
|
|
35,894
|
|
|
444
|
|
|
35,450
|
|
Total
|
$
|
86,603
|
|
|
$
|
361
|
|
|
$
|
(631
|
)
|
|
$
|
86,333
|
|
|
$
|
12,918
|
|
|
$
|
73,415
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2017
|
|
Adjusted
Cost
|
|
Gross
Unrealized
Gains
|
|
Gross
Unrealized
Losses
|
|
Fair
Value
|
|
Cash and
Cash
Equivalents
|
|
Marketable
Securities
|
Cash
|
$
|
7,158
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
7,158
|
|
|
$
|
7,158
|
|
|
$
|
0
|
|
Level 1:
|
|
|
|
|
|
|
|
|
|
|
|
Money market and other funds
|
1,833
|
|
|
0
|
|
|
0
|
|
|
1,833
|
|
|
1,833
|
|
|
0
|
|
U.S. government notes
|
37,256
|
|
|
2
|
|
|
(310
|
)
|
|
36,948
|
|
|
1,241
|
|
|
35,707
|
|
Marketable equity securities
|
242
|
|
|
100
|
|
|
(2
|
)
|
|
340
|
|
|
0
|
|
|
340
|
|
|
39,331
|
|
|
102
|
|
|
(312
|
)
|
|
39,121
|
|
|
3,074
|
|
|
36,047
|
|
Level 2:
|
|
|
|
|
|
|
|
|
|
|
|
Time deposits
(1)
|
359
|
|
|
0
|
|
|
0
|
|
|
359
|
|
|
357
|
|
|
2
|
|
Mutual funds
(2)
|
232
|
|
|
20
|
|
|
0
|
|
|
252
|
|
|
0
|
|
|
252
|
|
U.S. government agencies
|
3,713
|
|
|
0
|
|
|
(29
|
)
|
|
3,684
|
|
|
0
|
|
|
3,684
|
|
Foreign government bonds
|
2,948
|
|
|
6
|
|
|
(14
|
)
|
|
2,940
|
|
|
0
|
|
|
2,940
|
|
Municipal securities
|
7,631
|
|
|
2
|
|
|
(53
|
)
|
|
7,580
|
|
|
0
|
|
|
7,580
|
|
Corporate debt securities
|
24,269
|
|
|
21
|
|
|
(135
|
)
|
|
24,155
|
|
|
126
|
|
|
24,029
|
|
Mortgage-backed securities
|
11,157
|
|
|
9
|
|
|
(163
|
)
|
|
11,003
|
|
|
0
|
|
|
11,003
|
|
Asset-backed securities
|
5,632
|
|
|
4
|
|
|
(17
|
)
|
|
5,619
|
|
|
0
|
|
|
5,619
|
|
|
55,941
|
|
|
62
|
|
|
(411
|
)
|
|
55,592
|
|
|
483
|
|
|
55,109
|
|
Total
|
$
|
102,430
|
|
|
$
|
164
|
|
|
$
|
(723
|
)
|
|
$
|
101,871
|
|
|
$
|
10,715
|
|
|
$
|
91,156
|
|
|
|
(1)
|
The majority of our time deposits are foreign deposits.
|
|
|
(2)
|
The fair value option was elected for mutual funds with gains (losses) recognized in other income (expense), net.
|
We determine realized gains or losses on the sale of marketable securities on a specific identification method. We recognized gross realized gains of
$357 million
,
$272 million
, and
$207 million
for the years ended
December 31, 2015
,
2016
, and
2017
, respectively. We recognized gross realized losses of
$565 million
,
$482 million
, and
$287 million
for the years ended
December 31, 2015
,
2016
, and
2017
, respectively. We reflect these gains and losses as a component of other income (expense), net, in the Consolidated Statements of Income.
The following table summarizes the estimated fair value of our investments in marketable debt securities, accounted for as available-for-sale securities and classified by the contractual maturity date of the securities (in millions):
|
|
|
|
|
|
As of
December 31, 2017
|
Due in 1 year
|
$
|
19,486
|
|
Due in 1 year through 5 years
|
56,056
|
|
Due in 5 years through 10 years
|
2,676
|
|
Due after 10 years
|
12,346
|
|
Total
|
$
|
90,564
|
|
Impairment Considerations for Marketable Investments
The following tables present gross unrealized losses and fair values for those investments that were in an unrealized loss position as of
December 31, 2016
and
2017
, aggregated by investment category and the length of time that individual securities have been in a continuous loss position (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2016
|
|
|
Less than 12 Months
|
|
12 Months or Greater
|
|
Total
|
|
|
Fair Value
|
|
Unrealized
Loss
|
|
Fair Value
|
|
Unrealized
Loss
|
|
Fair Value
|
|
Unrealized
Loss
|
U.S. government notes
|
|
$
|
26,411
|
|
|
$
|
(215
|
)
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
26,411
|
|
|
$
|
(215
|
)
|
U.S. government agencies
|
|
1,014
|
|
|
(11
|
)
|
|
0
|
|
|
0
|
|
|
1,014
|
|
|
(11
|
)
|
Foreign government bonds
|
|
956
|
|
|
(7
|
)
|
|
0
|
|
|
0
|
|
|
956
|
|
|
(7
|
)
|
Municipal securities
|
|
3,461
|
|
|
(63
|
)
|
|
46
|
|
|
(2
|
)
|
|
3,507
|
|
|
(65
|
)
|
Corporate debt securities
|
|
6,184
|
|
|
(111
|
)
|
|
166
|
|
|
(5
|
)
|
|
6,350
|
|
|
(116
|
)
|
Mortgage-backed securities
|
|
10,184
|
|
|
(206
|
)
|
|
259
|
|
|
(10
|
)
|
|
10,443
|
|
|
(216
|
)
|
Asset-backed securities
|
|
391
|
|
|
(1
|
)
|
|
0
|
|
|
0
|
|
|
391
|
|
|
(1
|
)
|
Total
|
|
$
|
48,601
|
|
|
$
|
(614
|
)
|
|
$
|
471
|
|
|
$
|
(17
|
)
|
|
$
|
49,072
|
|
|
$
|
(631
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2017
|
|
|
Less than 12 Months
|
|
12 Months or Greater
|
|
Total
|
|
|
Fair Value
|
|
Unrealized
Loss
|
|
Fair Value
|
|
Unrealized
Loss
|
|
Fair Value
|
|
Unrealized
Loss
|
U.S. government notes
|
|
$
|
18,325
|
|
|
$
|
(134
|
)
|
|
$
|
16,136
|
|
|
$
|
(176
|
)
|
|
$
|
34,461
|
|
|
$
|
(310
|
)
|
U.S. government agencies
|
|
2,913
|
|
|
(22
|
)
|
|
767
|
|
|
(7
|
)
|
|
3,680
|
|
|
(29
|
)
|
Foreign government bonds
|
|
1,932
|
|
|
(8
|
)
|
|
342
|
|
|
(6
|
)
|
|
2,274
|
|
|
(14
|
)
|
Municipal securities
|
|
5,666
|
|
|
(47
|
)
|
|
415
|
|
|
(6
|
)
|
|
6,081
|
|
|
(53
|
)
|
Corporate debt securities
|
|
18,300
|
|
|
(114
|
)
|
|
1,710
|
|
|
(21
|
)
|
|
20,010
|
|
|
(135
|
)
|
Mortgage-backed securities
|
|
7,261
|
|
|
(89
|
)
|
|
3,314
|
|
|
(74
|
)
|
|
10,575
|
|
|
(163
|
)
|
Asset-backed securities
|
|
3,800
|
|
|
(16
|
)
|
|
135
|
|
|
(1
|
)
|
|
3,935
|
|
|
(17
|
)
|
Marketable equity securities
|
|
39
|
|
|
(2
|
)
|
|
0
|
|
|
0
|
|
|
39
|
|
|
(2
|
)
|
Total
|
|
$
|
58,236
|
|
|
$
|
(432
|
)
|
|
$
|
22,819
|
|
|
$
|
(291
|
)
|
|
$
|
81,055
|
|
|
$
|
(723
|
)
|
During the years ended December 31,
2016
and
2017
, there were
no
other-than-temporary impairment losses. During the year ended December 31,
2015
, we recognized
$281 million
of other-than-temporary impairment losses related to our marketable equity securities and fixed-income bond funds. Those losses are included in gain (loss) on marketable securities, net as a component of other income (expense), net, in the Consolidated Statements of Income. See
Note 7
for further details on other income (expense), net.
Derivative Financial Instruments
We recognize derivative instruments as either assets or liabilities in the Consolidated Balance Sheets at fair value. We record changes in the fair value (i.e., gains or losses) of the derivatives in the Consolidated Statements of
Income as either other income (expense), net, or revenues, or in the Consolidated Balance Sheets in accumulated other comprehensive income (AOCI), as discussed below.
We enter into foreign currency contracts with financial institutions to reduce the risk that our cash flows and earnings will be adversely affected by foreign currency exchange rate fluctuations. We also use interest rate derivative contracts to hedge interest rate exposures on our fixed income securities and debt issuances. Our program is not used for trading or speculative purposes.
We enter into master netting arrangements, which reduce credit risk by permitting net settlement of transactions with the same counterparty. To further reduce credit risk, we enter into collateral security arrangements under which the counterparty is required to provide collateral when the net fair value of certain financial instruments fluctuates from contractually established thresholds. We can take possession of the collateral in the event of counterparty default. As of
December 31, 2016
and
2017
, we received cash collateral related to the derivative instruments under our collateral security arrangements of
$362 million
and
$15 million
, respectively.
Cash Flow Hedges
We use foreign currency forwards and option contracts, including collars (an option strategy comprised of a combination of purchased and written options), designated as cash flow hedges to hedge certain forecasted revenue transactions denominated in currencies other than the U.S. dollar and at times we use interest rate swaps to effectively lock interest rates on anticipated debt issuances. These transactions are designated as cash flow hedges. The notional principal of these contracts was approximately
$10.7 billion
and
$11.7 billion
as of
December 31, 2016
and
2017
, respectively. These contracts have maturities of
2 years
or less.
We reflect the gains or losses on the effective portion of a cash flow hedge as a component of AOCI and subsequently reclassify cumulative gains and losses to revenues or interest expense when the hedged transactions are recorded. If the hedged transactions become probable of not occurring, the corresponding amounts in AOCI are immediately reclassified to other income (expense), net. For foreign currency collars, we include the change in time value in our assessment of hedge effectiveness. For other foreign currency options and forward contracts, we exclude the change in the forward points and time value from our assessment of hedge effectiveness. We recognize changes of the excluded components in other income (expense), net.
As of
December 31, 2017
, the effective portion of our cash flow hedges before tax effect was a net accumulated loss of
$187 million
, of which a net loss of
$219 million
is expected to be reclassified from AOCI into earnings within the next 12 months.
Fair Value Hedges
We use forward contracts designated as fair value hedges to hedge foreign currency risks for our investments denominated in currencies other than the U.S. dollar. We exclude changes in forward points for forward contracts from the assessment of hedge effectiveness. The notional principal of these contracts was
$2.4 billion
and
$2.9 billion
as of
December 31, 2016
and
2017
, respectively.
Gains and losses on these forward contracts are recognized in other income (expense), net, along with the offsetting gains and losses of the related hedged items.
Other Derivatives
Other derivatives not designated as hedging instruments consist of foreign currency forward contracts that we use to hedge intercompany transactions and other monetary assets or liabilities denominated in currencies other than the local currency of a subsidiary. We recognize gains and losses on these contracts, as well as the related costs in other income (expense), net, along with the foreign currency gains and losses on monetary assets and liabilities. The notional principal of the outstanding foreign exchange contracts was
$7.9 billion
and
$15.2 billion
as of
December 31, 2016
and
2017
, respectively.
The fair values of our outstanding derivative instruments were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2016
|
|
|
Balance Sheet Location
|
|
Fair Value of
Derivatives
Designated as
Hedging Instruments
|
|
Fair Value of
Derivatives Not
Designated as
Hedging Instruments
|
|
Total Fair
Value
|
Derivative Assets:
|
|
|
|
|
|
|
|
|
Level 2:
|
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
|
Other current and non-current assets
|
|
$
|
539
|
|
|
$
|
57
|
|
|
$
|
596
|
|
Total
|
|
|
|
$
|
539
|
|
|
$
|
57
|
|
|
$
|
596
|
|
Derivative Liabilities:
|
|
|
|
|
|
|
|
|
Level 2:
|
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
|
Accrued expenses and other liabilities, current and non-current
|
|
$
|
4
|
|
|
$
|
9
|
|
|
$
|
13
|
|
Total
|
|
|
|
$
|
4
|
|
|
$
|
9
|
|
|
$
|
13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2017
|
|
|
Balance Sheet Location
|
|
Fair Value of
Derivatives
Designated as
Hedging Instruments
|
|
Fair Value of
Derivatives Not
Designated as
Hedging Instruments
|
|
Total Fair
Value
|
Derivative Assets:
|
|
|
|
|
|
|
|
|
Level 2:
|
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
|
Other current and non-current assets
|
|
$
|
51
|
|
|
$
|
29
|
|
|
$
|
80
|
|
Total
|
|
|
|
$
|
51
|
|
|
$
|
29
|
|
|
$
|
80
|
|
Derivative Liabilities:
|
|
|
|
|
|
|
|
|
Level 2:
|
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
|
Accrued expenses and other liabilities, current and non-current
|
|
$
|
230
|
|
|
$
|
122
|
|
|
$
|
352
|
|
Total
|
|
|
|
$
|
230
|
|
|
$
|
122
|
|
|
$
|
352
|
|
The effect of derivative instruments in cash flow hedging relationships on income and other comprehensive income (OCI) is summarized below (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gains (Losses) Recognized in OCI
on Derivatives Before Tax Effect (Effective Portion)
|
|
|
Year Ended December 31,
|
Derivatives in Cash Flow Hedging Relationship
|
|
2015
|
|
2016
|
|
2017
|
Foreign exchange contracts
|
|
$
|
964
|
|
|
$
|
773
|
|
|
$
|
(955
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gains (Losses) Reclassified from AOCI into Income (Effective Portion)
|
|
|
|
|
Year Ended December 31,
|
Derivatives in Cash Flow Hedging Relationship
|
|
Location
|
|
2015
|
|
2016
|
|
2017
|
Foreign exchange contracts
|
|
Revenues
|
|
$
|
1,399
|
|
|
$
|
539
|
|
|
$
|
(169
|
)
|
Interest rate contracts
|
|
Other income (expense), net
|
|
5
|
|
|
5
|
|
|
5
|
|
Total
|
|
|
|
$
|
1,404
|
|
|
$
|
544
|
|
|
$
|
(164
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gains (Losses) Recognized in Income on Derivatives (Amount
Excluded from Effectiveness Testing and Ineffective Portion)
(1)
|
|
|
|
|
Year Ended December 31,
|
Derivatives in Cash Flow Hedging Relationship
|
|
Location
|
|
2015
|
|
2016
|
|
2017
|
Foreign exchange contracts
|
|
Other income (expense), net
|
|
$
|
(297
|
)
|
|
$
|
(381
|
)
|
|
$
|
83
|
|
|
|
(1)
|
Gains (losses) related to the ineffective portion of the hedges were not material in all periods presented.
|
The effect of derivative instruments in fair value hedging relationships on income is summarized below (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gains (Losses) Recognized in Income on Derivatives
(2)
|
|
|
|
|
Year Ended December 31,
|
Derivatives in Fair Value Hedging Relationship
|
|
Location
|
|
2015
|
|
2016
|
|
2017
|
Foreign Exchange Hedges:
|
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
|
Other income (expense), net
|
|
$
|
170
|
|
|
$
|
145
|
|
|
$
|
(174
|
)
|
Hedged item
|
|
Other income (expense), net
|
|
(176
|
)
|
|
(139
|
)
|
|
197
|
|
Total
|
|
|
|
$
|
(6
|
)
|
|
$
|
6
|
|
|
$
|
23
|
|
|
|
(2)
|
Amounts excluded from effectiveness testing and the ineffective portion of the fair value hedging relationships were not material in all periods presented.
|
The effect of derivative instruments not designated as hedging instruments on income is summarized below (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gains (Losses) Recognized in Income on Derivatives
|
|
|
|
|
Year Ended December 31,
|
Derivatives Not Designated As Hedging Instruments
|
|
Location
|
|
2015
|
|
2016
|
|
2017
|
Foreign exchange contracts
|
|
Other income (expense), net
|
|
$
|
198
|
|
|
$
|
130
|
|
|
$
|
(230
|
)
|
Offsetting of Derivatives
We present our forwards and purchased options at gross fair values in the Consolidated Balance Sheets. For foreign currency collars, we present at net fair values where both purchased and written options are with the same counterparty. Our master netting and other similar arrangements allow net settlements under certain conditions. As of
December 31, 2016
and
2017
, information related to these offsetting arrangements were as follows (in millions):
Offsetting of Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2016
|
|
|
|
|
|
|
|
Gross Amounts Not Offset in the Consolidated Balance Sheets, but Have Legal Rights to Offset
|
|
|
|
Gross Amounts of Recognized Assets
|
|
Gross Amounts Offset in the Consolidated Balance Sheets
|
|
Net Presented in the Consolidated Balance Sheets
|
|
Financial Instruments
|
|
Cash Collateral Received
|
|
Non-Cash Collateral Received
|
|
Net Assets Exposed
|
Derivatives
|
$
|
596
|
|
|
$
|
0
|
|
|
$
|
596
|
|
|
$
|
(11
|
)
|
(1)
|
$
|
(337
|
)
|
|
$
|
(73
|
)
|
|
$
|
175
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2017
|
|
|
|
|
|
|
|
Gross Amounts Not Offset in the Consolidated Balance Sheets, but Have Legal Rights to Offset
|
|
|
|
Gross Amounts of Recognized Assets
|
|
Gross Amounts Offset in the Consolidated Balance Sheets
|
|
Net Presented in the Consolidated Balance Sheets
|
|
Financial Instruments
|
|
Cash Collateral Received
|
|
Non-Cash Collateral Received
|
|
Net Assets Exposed
|
Derivatives
|
$
|
102
|
|
|
$
|
(22
|
)
|
|
$
|
80
|
|
|
$
|
(64
|
)
|
(1)
|
$
|
(4
|
)
|
|
$
|
(2
|
)
|
|
$
|
10
|
|
|
|
(1)
|
The balances as of
December 31, 2016
and
2017
were related to derivative liabilities which are allowed to be net settled against derivative assets in accordance with our master netting agreements.
|
Offsetting of Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2016
|
|
|
|
|
|
|
|
Gross Amounts Not Offset in the Consolidated Balance Sheets, but Have Legal Rights to Offset
|
|
|
|
Gross Amounts of Recognized Liabilities
|
|
Gross Amounts Offset in the Consolidated Balance Sheets
|
|
Net Presented in the Consolidated Balance Sheets
|
|
Financial Instruments
|
|
Cash Collateral Pledged
|
|
Non-Cash Collateral Pledged
|
|
Net Liabilities
|
Derivatives
|
$
|
13
|
|
|
$
|
0
|
|
|
$
|
13
|
|
|
$
|
(11
|
)
|
(2)
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2017
|
|
|
|
|
|
|
|
Gross Amounts Not Offset in the Consolidated Balance Sheets, but Have Legal Rights to Offset
|
|
|
Gross Amounts of Recognized Liabilities
|
|
Gross Amounts Offset in the Consolidated Balance Sheets
|
|
Net Presented in the Consolidated Balance Sheets
|
|
Financial Instruments
|
|
Cash Collateral Pledged
|
|
Non-Cash Collateral Pledged
|
|
Net Liabilities
|
Derivatives
|
$
|
374
|
|
|
$
|
(22
|
)
|
|
$
|
352
|
|
|
$
|
(64
|
)
|
(2)
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
288
|
|
|
|
(2)
|
The balances as of
December 31, 2016
and
2017
were related to derivative assets which are allowed to be net settled against derivative liabilities in accordance with our master netting agreements.
|
Note 4.
Non-Marketable Investments
Our non-marketable investments include non-marketable equity investments and non-marketable debt securities.
Non-Marketable Equity Investments
Our non-marketable equity investments are investments in privately-held companies accounted for under the equity or cost method and are not required to be consolidated under the variable interest or voting models. As of
December 31, 2016
and
2017
, investments accounted for under the equity method had a carrying value of approximately
$1.7 billion
and
$1.4 billion
, respectively. Our share of gains and losses in equity method investments including impairment was a net loss of
$227 million
,
$202 million
, and
$156 million
for the years ended
December 31, 2015
,
2016
, and
2017
, respectively. As of
December 31, 2016
and
2017
, investments accounted for under the cost method had a carrying value of
$3.0 billion
and
$4.5 billion
, respectively, and a fair value of approximately
$8.1 billion
and
$8.8 billion
, respectively. The fair value of the cost method investments are primarily determined from data leveraging private-market transactions and are classified within Level 3 in the fair value hierarchy. We reflect our share of equity
method investee earnings and losses and impairments of non-marketable equity investments as a component of other income (expense), net, in the Consolidated Statements of Income.
Non-Marketable Debt Securities
Our non-marketable debt securities are primarily preferred stock that are redeemable at our option and convertible notes issued by private companies and measured at fair value as available for sale debt securities. The cost of these securities was
$1.1 billion
as of
December 31, 2016
and
2017
. These debt securities do not have readily determinable market values and are categorized accordingly as Level 3 in the fair value hierarchy. To estimate the fair value of these securities, we use a combination of valuation methodologies, including market and income approaches based on prior transaction prices; estimated timing, probability, and amount of cash flows; and illiquidity considerations. Financial information of private companies may not be available and consequently we estimate the value based on the best available information at the measurement date.
The following table presents a reconciliation for our non-marketable debt securities measured and recorded at fair value on a recurring basis, using significant unobservable inputs (Level 3) (in millions):
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
2016
|
|
2017
|
Beginning balance
|
$
|
1,024
|
|
|
$
|
1,165
|
|
Total net gains (losses)
|
|
|
|
Included in earnings
|
0
|
|
|
(10
|
)
|
Included in other comprehensive income
|
106
|
|
|
707
|
|
Purchases
|
78
|
|
|
88
|
|
Sales
|
(18
|
)
|
|
(2
|
)
|
Settlements
|
(25
|
)
|
|
(54
|
)
|
Ending balance
|
$
|
1,165
|
|
|
$
|
1,894
|
|
Note 5.
Variable Interest Entities (VIEs)
Consolidated VIEs
We consolidate VIEs in which we hold a variable interest and are the primary beneficiary. The results of operations and statements of financial position of these VIEs are included in our consolidated financial statements.
For certain consolidated VIEs, their assets are not available to us and their creditors do not have recourse to us. As of
December 31, 2016
and
2017
, assets that can only be used to settle obligations of these VIEs were
$1.1 billion
and
$1.7 billion
, respectively, and the liabilities for which creditors do not have recourse to us were
$668 million
and
$997 million
, respectively.
Calico
Calico is a life science company with a mission to harness advanced technologies to increase our understanding of the biology that controls lifespan. As of
December 31, 2017
, we have contributed
$240 million
to Calico in exchange for Calico convertible preferred units and are committed to fund an additional
$490 million
on an as-needed basis.
In September 2014, AbbVie Inc. (AbbVie) and Calico announced a research and development collaboration agreement intended to help both companies discover, develop, and bring to market new therapies for patients with age-related diseases, including neurodegeneration and cancer. As of
December 31, 2017
, AbbVie has contributed
$750 million
to fund the collaboration pursuant to the agreement, which reflects its total commitment.
As of December 31, 2017
, Calico has contributed $
250 million
and committed up to an additional $
500 million
.
Calico has used its scientific expertise to establish a world-class research and development facility, with a focus on drug discovery and early drug development; and AbbVie provides scientific and clinical development support and its commercial expertise to bring new discoveries to market. Both companies share costs and profits equally. AbbVie's contribution has been recorded as a liability on Calico's financial statements, which is reduced and reflected as a reduction to research and development expense as eligible research and development costs are incurred by Calico.
Verily
Verily is a life science company with a mission to make the world's health data useful so that people enjoy healthier lives.
In
January 2017
, Temasek, a Singapore-based investment company, signed a binding commitment to purchase a noncontrolling interest in Verily for an aggregate of
$800 million
in cash. In February 2017, the first tranche of the investment closed and we received
$480 million
. The second and final tranche of the investment closed in July 2017 and we received the remaining
$320 million
. The transaction is accounted for as an equity transaction and no gain or loss was recognized. Of the
$800 million
received,
$78 million
was recorded as noncontrolling interest and
$722 million
was recorded as additional paid-in capital. Noncontrolling interest and net loss attributable to noncontrolling interest were not separately presented on our consolidated financial statements as of and for the year ended
December 31, 2017
as the amounts were not material.
Unconsolidated VIEs
Certain renewable energy investments included in our non-marketable equity investments accounted for under the equity method are VIEs. These entities' activities involve power generation using renewable sources. We have determined that the governance structures of these entities do not allow us to direct the activities that would significantly impact their economic performance such as setting operating budgets. Therefore, we do not consolidate these VIEs in our consolidated financial statements. The carrying value and maximum exposure of these VIEs were
$1.2 billion
and
$0.9 billion
as of
December 31, 2016
and
2017
, respectively. The maximum exposure is based on current investments to date. We have determined the single source of our exposure to these VIEs is our capital investment in them.
Other unconsolidated VIEs were not material as of
December 31, 2016
and
2017
.
Note 6.
Debt
Short-Term Debt
We have a debt financing program of up to
$5.0 billion
through the issuance of commercial paper. Net proceeds from this program are used for general corporate purposes. We had
no
commercial paper outstanding as of
December 31, 2016
and
December 31, 2017
, respectively.
Long-Term Debt
Google issued
$3.0 billion
of senior unsecured notes in
three
tranches (collectively, 2011 Notes) in May 2011, due in 2014, 2016, and 2021, as well as
$1.0 billion
of senior unsecured notes (2014 Notes) in February 2014 due in 2024.
In April 2016, we completed an exchange offer with eligible holders of Google’s 2011 Notes due 2021 and 2014 Notes due 2024 (collectively, the Google Notes). An aggregate principal amount of approximately
$1.7 billion
of the Google Notes was exchanged for approximately
$1.7 billion
of Alphabet notes with identical interest rate and maturity. Because the exchange was between a parent and the subsidiary company and for substantially identical notes, the change was treated as a debt modification for accounting purposes with
no
gain or loss recognized.
In August 2016, Alphabet issued
$2.0 billion
of senior unsecured notes (2016 Notes) due 2026. The net proceeds from the issuance of the 2016 Notes were used for general corporate purposes, including the repayment of outstanding commercial paper. The Alphabet notes due in 2021, 2024, and 2026 rank equally with each other and are structurally subordinate to the outstanding Google Notes.
The total outstanding long-term debt is summarized below (in millions):
|
|
|
|
|
|
|
|
|
|
As of
December 31, 2016
|
|
As of
December 31, 2017
|
3.625% Notes due on May 19, 2021
|
$
|
1,000
|
|
|
$
|
1,000
|
|
3.375% Notes due on February 25, 2024
|
1,000
|
|
|
1,000
|
|
1.998% Notes due on August 15, 2026
|
2,000
|
|
|
2,000
|
|
Unamortized discount for the Notes above
|
(65
|
)
|
|
(57
|
)
|
Subtotal
(1)
|
$
|
3,935
|
|
|
$
|
3,943
|
|
Capital lease obligation
|
0
|
|
|
26
|
|
Total long-term debt
|
$
|
3,935
|
|
|
$
|
3,969
|
|
|
|
(1)
|
Includes the outstanding (and unexchanged) Google Notes issued in 2011 and 2014 and the Alphabet notes exchanged in 2016.
|
The effective interest yields based on proceeds received from the outstanding notes due in 2021, 2024, and 2026 were
3.734%
,
3.377%
, and
2.231%
, respectively, with interest payable semi-annually. We may redeem these notes at any time in whole or in part at specified redemption prices. The total estimated fair value of all outstanding notes
was approximately
$3.9 billion
as of
December 31, 2016
and
$4.0 billion
as of
December 31, 2017
. The fair value was determined based on observable market prices of identical instruments in less active markets and is categorized accordingly as Level 2 in the fair value hierarchy.
As of
December 31, 2017
, the aggregate future principal payments for long-term debt including long-term capital leases for each of the next five years and thereafter are as follows (in millions):
|
|
|
|
|
|
2018
|
|
$
|
0
|
|
2019
|
|
1
|
|
2020
|
|
1
|
|
2021
|
|
1,001
|
|
2022
|
|
1
|
|
Thereafter
|
|
3,022
|
|
Total
|
|
$
|
4,026
|
|
Credit Facility
We have a
$4.0 billion
revolving credit facility which expires in February 2021. The interest rate for the credit facility is determined based on a formula using certain market rates.
No
amounts were outstanding under the credit facility as of
December 31, 2016
and
December 31, 2017
.
Note 7.
Supplemental Financial Statement Information
Property and Equipment, Net
Property and equipment, net, consisted of the following (in millions):
|
|
|
|
|
|
|
|
|
|
As of
December 31, 2016
|
|
As of
December 31, 2017
|
Land and buildings
|
$
|
19,804
|
|
|
$
|
23,183
|
|
Information technology assets
|
16,084
|
|
|
21,429
|
|
Construction in progress
|
8,166
|
|
|
10,491
|
|
Leasehold improvements
|
3,415
|
|
|
4,496
|
|
Furniture and fixtures
|
58
|
|
|
48
|
|
Property and equipment, gross
|
47,527
|
|
|
59,647
|
|
Less: accumulated depreciation
|
(13,293
|
)
|
|
(17,264
|
)
|
Property and equipment, net
|
$
|
34,234
|
|
|
$
|
42,383
|
|
As of
December 31, 2016
and
2017
, assets under capital lease with a cost basis of
$299 million
and
$390 million
were included in property and equipment, respectively.
Note Receivable
In connection with the sale of our Motorola Mobile business to Lenovo Group Limited (Lenovo) in October 2014, we received an interest-free,
three
-year prepayable promissory note (Note Receivable) due October 2017. The Note Receivable was included on our Consolidated Balance Sheets in other current assets as of December 31, 2016. Based on the general market conditions and the credit quality of Lenovo at the time of the sale, we discounted the Note Receivable at an effective interest rate of
4.5%
.
As of December 31, 2016
, the outstanding principal was
$1.4 billion
with an unamortized discount of
$51 million
, and we did not recognize a valuation allowance. The Note Receivable was fully repaid in May 2017.
Accrued expenses and other current liabilities
Accrued expenses and other current liabilities consisted of the following (in millions):
|
|
|
|
|
|
|
|
|
|
As of
December 31, 2016
|
|
As of
December 31, 2017
|
European Commission fine
(1)
|
$
|
0
|
|
|
$
|
2,874
|
|
Accrued customer liabilities
|
1,256
|
|
|
1,489
|
|
Other accrued expenses and current liabilities
|
4,888
|
|
|
5,814
|
|
Accrued expenses and other current liabilities
|
$
|
6,144
|
|
|
$
|
10,177
|
|
|
|
(1)
|
Includes the effects of foreign exchange and interest.
|
Accumulated Other Comprehensive Income (Loss)
The components of AOCI, net of tax, were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign Currency Translation Adjustments
|
|
Unrealized Gains (Losses) on Available-for-Sale Investments
|
|
Unrealized Gains (Losses) on Cash Flow Hedges
|
|
Total
|
Balance as of December 31, 2014
|
$
|
(980
|
)
|
|
$
|
421
|
|
|
$
|
586
|
|
|
$
|
27
|
|
Other comprehensive income (loss) before reclassifications
|
(1,067
|
)
|
|
(715
|
)
|
|
676
|
|
|
(1,106
|
)
|
Amounts reclassified from AOCI
|
0
|
|
|
208
|
|
|
(1,003
|
)
|
|
(795
|
)
|
Other comprehensive income (loss)
|
(1,067
|
)
|
|
(507
|
)
|
|
(327
|
)
|
|
(1,901
|
)
|
Balance as of December 31, 2015
|
$
|
(2,047
|
)
|
|
$
|
(86
|
)
|
|
$
|
259
|
|
|
$
|
(1,874
|
)
|
Other comprehensive income (loss) before reclassifications
|
(599
|
)
|
|
(314
|
)
|
|
515
|
|
|
(398
|
)
|
Amounts reclassified from AOCI
|
0
|
|
|
221
|
|
|
(351
|
)
|
|
(130
|
)
|
Other comprehensive income (loss)
|
(599
|
)
|
|
(93
|
)
|
|
164
|
|
|
(528
|
)
|
Balance as of December 31, 2016
|
$
|
(2,646
|
)
|
|
$
|
(179
|
)
|
|
$
|
423
|
|
|
$
|
(2,402
|
)
|
Other comprehensive income (loss) before reclassifications
|
1,543
|
|
|
307
|
|
|
(638
|
)
|
|
1,212
|
|
Amounts reclassified from AOCI
|
0
|
|
|
105
|
|
|
93
|
|
|
198
|
|
Other comprehensive income (loss)
|
1,543
|
|
|
412
|
|
|
(545
|
)
|
|
1,410
|
|
Balance as of December 31, 2017
|
$
|
(1,103
|
)
|
|
$
|
233
|
|
|
$
|
(122
|
)
|
|
$
|
(992
|
)
|
The effects on net income of amounts reclassified from AOCI were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gains (Losses) Reclassified from AOCI to the Consolidated Statement of Income
|
|
|
|
|
Year Ended December 31,
|
AOCI Components
|
|
Location
|
|
2015
|
|
2016
|
|
2017
|
Unrealized gains (losses) on available-for-sale investments
|
|
|
|
|
|
|
|
|
Other income (expense), net
|
|
$
|
(208
|
)
|
|
$
|
(221
|
)
|
|
$
|
(105
|
)
|
|
|
Provision for income taxes
|
|
0
|
|
|
0
|
|
|
0
|
|
|
|
Net of tax
|
|
$
|
(208
|
)
|
|
$
|
(221
|
)
|
|
$
|
(105
|
)
|
Unrealized gains (losses) on cash flow hedges
|
|
|
|
|
|
|
Foreign exchange contracts
|
|
Revenue
|
|
$
|
1,399
|
|
|
$
|
539
|
|
|
$
|
(169
|
)
|
Interest rate contracts
|
|
Other income (expense), net
|
|
5
|
|
|
5
|
|
|
5
|
|
|
|
Benefit (provision) for income taxes
|
|
(401
|
)
|
|
(193
|
)
|
|
71
|
|
|
|
Net of tax
|
|
$
|
1,003
|
|
|
$
|
351
|
|
|
$
|
(93
|
)
|
Total amount reclassified, net of tax
|
|
|
|
$
|
795
|
|
|
$
|
130
|
|
|
$
|
(198
|
)
|
Other Income (Expense), Net
The components of other income (expense), net, were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2015
|
|
2016
|
|
2017
|
Interest income
|
$
|
999
|
|
|
$
|
1,220
|
|
|
$
|
1,312
|
|
Interest expense
(1)
|
(104
|
)
|
|
(124
|
)
|
|
(109
|
)
|
Foreign currency exchange losses, net
(2)
|
(422
|
)
|
|
(475
|
)
|
|
(121
|
)
|
Loss on marketable securities, net
|
(208
|
)
|
|
(210
|
)
|
|
(80
|
)
|
Loss on non-marketable investments, net
|
(126
|
)
|
|
(65
|
)
|
|
(114
|
)
|
Other
|
152
|
|
|
88
|
|
|
159
|
|
Other income (expense), net
|
$
|
291
|
|
|
$
|
434
|
|
|
$
|
1,047
|
|
|
|
(1)
|
Interest expense is net of interest capitalized of
$0 million
,
$0 million
, and
$48 million
for the years ended
December 31, 2015
,
2016
, and
2017
, respectively.
|
|
|
(2)
|
Our foreign currency exchange losses, net, are related to the option premium costs and forward points for our foreign currency hedging contracts, our foreign exchange transaction gains and losses from the conversion of the transaction currency to the functional currency, offset by the foreign currency hedging contract losses and gains. The net foreign currency transaction losses were
$123 million
,
$112 million
, and
$226 million
for the years ended December 31,
2015
,
2016
, and
2017
, respectively.
|
Note 8.
Acquisitions
2017 Acquisitions
During the year ended
December 31, 2017
, we completed
various
acquisitions and purchases of intangible assets for total consideration of approximately
$322 million
. In aggregate,
$12 million
was cash acquired,
$117 million
was attributed to intangible assets,
$221 million
was attributed to goodwill, and
$28 million
was attributed to
net liabilities assumed
. These acquisitions generally enhance the breadth and depth of our offerings and expand our expertise in engineering and other functional areas. The amount of goodwill expected to be deductible for tax purposes is approximately
$60 million
.
Pro forma results of operations for these acquisitions have not been presented because they are not material to the consolidated results of operations, either individually or in aggregate.
For all intangible assets acquired and purchased during the year ended
December 31, 2017
, patents and developed technology have a weighted-average useful life of
3.7
years, customer relationships have a weighted-average useful life of
2.0
years, and trade names and other have a weighted-average useful life of
8.8
years.
Agreement with HTC Corporation (HTC)
In January 2018, we completed the acquisition of a team of engineers and a non-exclusive license of intellectual property from HTC for
$1.1 billion
in cash. The transaction will be accounted for as a business combination. We expect this transaction to accelerate Google’s ongoing hardware efforts. We are currently in the process of valuing the assets acquired and liabilities assumed in the transaction. We will provide all required disclosures upon the completion of the valuation in the first quarter of 2018.
2016 Acquisitions
Apigee
In October 2016, we completed the acquisition of Apigee Corp., a provider of application programming interface (API) management, for approximately
$571 million
in cash. We expect the acquisition to accelerate our Google Cloud customers’ move to supporting their businesses with high quality digital interactions. Of the total purchase price of
$571 million
,
$41 million
was cash acquired,
$127 million
was attributed to intangible assets,
$376 million
was attributed to goodwill, and
$27 million
was attributed to
net assets acquired
. Goodwill, which was recorded in the Google segment, is primarily attributable to synergies expected to arise after the acquisition and is
no
t deductible for tax purposes.
Other Acquisitions
During the year ended
December 31, 2016
, we completed other acquisitions and purchases of intangible assets for total consideration of approximately
$448 million
. In aggregate,
$12 million
was cash acquired,
$143 million
was attributed to intangible assets,
$288 million
was attributed to goodwill, and
$5 million
was attributed to
net assets acquired
. These acquisitions generally enhance the breadth and depth of our offerings, as well as expanding our
expertise in engineering and other functional areas. The amount of goodwill expected to be deductible for tax purposes is approximately
$67 million
.
Pro forma results of operations for these acquisitions have not been presented because they are not material to the consolidated results of operations, either individually or in aggregate.
For all intangible assets acquired and purchased during the year ended
December 31, 2016
, patents and developed technology have a weighted-average useful life of
4.5
years, customer relationships have a weighted-average useful life of
3.4
years, and trade names and other have a weighted-average useful life of
6.2
years.
Note 9.
Goodwill and Other Intangible Assets
Goodwill
The changes in the carrying amount of goodwill allocated to our disclosed segments for the years ended
December 31, 2016
and
2017
were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Google
|
|
Other Bets
|
|
Total Consolidated
|
Balance as of December 31, 2015
|
$
|
15,456
|
|
|
$
|
413
|
|
|
$
|
15,869
|
|
Acquisitions
|
625
|
|
|
39
|
|
|
664
|
|
Foreign currency translation and other adjustments
|
(54
|
)
|
|
(11
|
)
|
|
(65
|
)
|
Balance as of December 31, 2016
|
$
|
16,027
|
|
|
$
|
441
|
|
|
$
|
16,468
|
|
Acquisitions
|
212
|
|
|
9
|
|
|
221
|
|
Foreign currency translation and other adjustments
|
56
|
|
|
2
|
|
|
58
|
|
Balance as of December 31, 2017
|
$
|
16,295
|
|
|
$
|
452
|
|
|
$
|
16,747
|
|
Other Intangible Assets
Information regarding purchased intangible assets were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2016
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net
Carrying
Amount
|
Patents and developed technology
|
$
|
5,542
|
|
|
$
|
2,710
|
|
|
$
|
2,832
|
|
Customer relationships
|
352
|
|
|
197
|
|
|
155
|
|
Trade names and other
|
463
|
|
|
143
|
|
|
320
|
|
Total
|
$
|
6,357
|
|
|
$
|
3,050
|
|
|
$
|
3,307
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2017
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net
Carrying
Value
|
Patents and developed technology
|
$
|
5,260
|
|
|
$
|
3,040
|
|
|
$
|
2,220
|
|
Customer relationships
|
359
|
|
|
263
|
|
|
96
|
|
Trade names and other
|
544
|
|
|
168
|
|
|
376
|
|
Total
|
$
|
6,163
|
|
|
$
|
3,471
|
|
|
$
|
2,692
|
|
Patents and developed technology, customer relationships, and trade names and other have weighted-average remaining useful lives of
3.8
years,
1.4
years, and
4.6
years, respectively.
Amortization expense relating to purchased intangible assets was
$892 million
,
$833 million
, and
$796 million
for the years ended
December 31, 2015
,
2016
, and
2017
, respectively.
As of
December 31, 2017
, expected amortization expense relating to purchased intangible assets for each of the next five years and thereafter are as follows (in millions):
|
|
|
|
|
2018
|
$
|
728
|
|
2019
|
615
|
|
2020
|
493
|
|
2021
|
459
|
|
2022
|
212
|
|
Thereafter
|
185
|
|
|
$
|
2,692
|
|
Note 10.
Commitments and Contingencies
Operating Leases
We have entered into various non-cancelable operating lease agreements for certain of our offices, facilities, land, and data centers throughout the world with lease periods expiring between
2018
and
2063
. We are committed to pay a portion of the actual operating expenses under certain of these lease agreements. These operating expenses are not included in the table below. Certain of these arrangements have free or escalating rent payment provisions. We recognize rent expense on a straight-line basis.
As of
December 31, 2017
, future minimum payments under operating leases having initial or remaining non-cancelable lease terms in excess of one year, net of sublease income amounts, were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Leases
(1)
|
|
Sub-lease
Income
|
|
Net Operating Leases
|
2018
|
$
|
1,175
|
|
|
$
|
15
|
|
|
$
|
1,160
|
|
2019
|
1,133
|
|
|
13
|
|
|
1,120
|
|
2020
|
1,073
|
|
|
11
|
|
|
1,062
|
|
2021
|
975
|
|
|
7
|
|
|
968
|
|
2022
|
831
|
|
|
3
|
|
|
828
|
|
Thereafter
|
3,616
|
|
|
1
|
|
|
3,615
|
|
Total minimum payments
|
$
|
8,803
|
|
|
$
|
50
|
|
|
$
|
8,753
|
|
|
|
(1)
|
Includes future minimum payments for leases which have not yet commenced.
|
We have entered into certain non-cancelable lease agreements with lease periods expiring between
2021
and
2044
where we are the deemed owner for accounting purposes of new construction projects. Excluded from the table above are future minimum lease payments under such leases totaling approximately
$2.1 billion
, for which a
$1.3 billion
liability is included on the Consolidated Balance Sheets as of
December 31, 2017
.
Rent expense under operating leases was
$734 million
,
$897 million
, and
$1.1 billion
for the years ended December 31,
2015
,
2016
, and
2017
, respectively.
Purchase Obligations
As of
December 31, 2017
, we had
$7.2 billion
of other non-cancelable contractual obligations, primarily related to data center operations and build-outs, digital media content licensing, and purchases of inventory.
Indemnifications
In the normal course of business, to facilitate transactions in our services and products, we indemnify certain parties, including advertisers, Google Network Members, and lessors with respect to certain matters. We have agreed to hold certain parties harmless against losses arising from a breach of representations or covenants, or out of intellectual property infringement or other claims made against certain parties. Several of these agreements limit the time within which an indemnification claim can be made and the amount of the claim. In addition, we have entered into indemnification agreements with our officers and directors, and our bylaws contain similar indemnification obligations to our agents.
It is not possible to make a reasonable estimate of the maximum potential amount under these indemnification agreements due to the unique facts and circumstances involved in each particular agreement. Additionally, we have
a limited history of prior indemnification claims and the payments we have made under such agreements have not had a material adverse effect on our results of operations, cash flows, or financial position. However, to the extent that valid indemnification claims arise in the future, future payments by us could be significant and could have a material adverse effect on our results of operations or cash flows in a particular period.
As of
December 31, 2017
, we did not have any material indemnification claims that were probable or reasonably possible.
Legal Matters
Antitrust Investigations
On November 30, 2010, the European Commission's (EC) Directorate General for Competition opened an investigation into various antitrust-related complaints against us.
On April 15, 2015, the EC issued a Statement of Objections (SO) regarding the display and ranking of shopping search results and ads, to which we responded on August 27, 2015. On July 14, 2016, the EC issued a Supplementary SO regarding shopping search results and ads. On June 27, 2017, the EC announced its decision that certain actions taken by Google regarding its display and ranking of shopping search results and ads infringed European competition law. The EC decision imposed a
€2.42 billion
(approximately
$2.74 billion
as of June 27, 2017) fine. On September 11, 2017, we appealed the EC decision and on September 27, 2017, we implemented product changes to bring shopping ads into compliance with the EC's decision. We recognized a charge of approximately
$2.74 billion
for the fine in the second quarter of 2017. The fine is included in accrued expenses and other current liabilities on our Consolidated Balance Sheets as we provided bank guarantees in lieu of a cash payment for the fine.
On April 20, 2016, the EC issued an SO regarding certain Android distribution practices. On July 14, 2016, the EC issued an SO regarding the syndication of AdSense for Search. We responded to the SOs and continue to respond to the EC's informational requests. There is significant uncertainty as to the outcomes of these investigations; however, adverse decisions could result in fines and directives to alter or terminate certain conduct. Given the nature of these cases, we are unable to estimate the reasonably possible loss or ranges of loss, if any. We remain committed to working with the EC to resolve these matters.
The Comision Nacional de Defensa de la Competencia in Argentina, the Competition Commission of India (CCI), Brazil's Council for Economic Defense (CADE), and the Korean Fair Trade Commission have also opened investigations into certain of our business practices. In November 2016, we responded to the CCI Director General's report with interim findings of competition law infringements regarding search and ads.
Patent and Intellectual Property Claims
We have had patent, copyright, and trademark infringement lawsuits filed against us claiming that certain of our products, services, and technologies infringe the intellectual property rights of others. Adverse results in these lawsuits may include awards of substantial monetary damages, costly royalty or licensing agreements, or orders preventing us from offering certain features, functionalities, products, or services, and may also cause us to change our business practices, and require development of non-infringing products or technologies, which could result in a loss of revenues for us and otherwise harm our business. In addition, the U.S. International Trade Commission (ITC) has increasingly become an important forum to litigate intellectual property disputes because an ultimate loss for a company or its suppliers in an ITC action could result in a prohibition on importing infringing products into the U.S. Because the U.S. is an important market, a prohibition on importation could have an adverse effect on us, including preventing us from importing many important products into the U.S. or necessitating workarounds that may limit certain features of our products.
Furthermore, many of our agreements with our customers and partners require us to indemnify them for certain intellectual property infringement claims against them, which would increase our costs as a result of defending such claims, and may require that we pay significant damages if there were an adverse ruling in any such claims. Our customers and partners may discontinue the use of our products, services, and technologies, as a result of injunctions or otherwise, which could result in loss of revenues and adversely impact our business.
Oracle America, Inc. (Oracle) brought a copyright lawsuit against Google in the Northern District of California, alleging that Google's Android operating system infringes Oracle's copyrights related to certain Java application programming interfaces. After trial, final judgment was entered by the district court in favor of Google on June 8, 2016, and the court decided post-trial motions in favor of Google. Oracle has appealed. We believe this lawsuit is without merit and are defending ourselves vigorously. Given the nature of this case, we are unable to estimate the reasonably possible loss or range of loss, if any, arising from this matter.
Other
We are also regularly subject to claims, suits, regulatory and government investigations, and other proceedings involving competition (such as the pending EC investigations described above), intellectual property, privacy, tax, labor and employment, commercial disputes, content generated by our users, goods and services offered by advertisers or publishers using our platforms, personal injury, consumer protection, and other matters. Such claims, suits, regulatory and government investigations, and other proceedings could result in fines, civil or criminal penalties, or other adverse consequences.
Certain of our outstanding legal matters include speculative claims for substantial or indeterminate amounts of damages. We record a liability when we believe that it is probable that a loss has been incurred and the amount can be reasonably estimated. If we determine that a loss is reasonably possible and the loss or range of loss can be estimated, we disclose the reasonably possible loss. We evaluate developments in our legal matters that could affect the amount of liability that has been previously accrued, and the matters and related reasonably possible losses disclosed, and make adjustments as appropriate. Significant judgment is required to determine both likelihood of there being, and the estimated amount of, a loss related to such matters.
With respect to our outstanding legal matters, based on our current knowledge, we believe that the amount or range of reasonably possible loss will not, either individually or in the aggregate, have a material adverse effect on our business, consolidated financial position, results of operations, or cash flows. However, the outcome of such legal matters is inherently unpredictable and subject to significant uncertainties.
We expense legal fees in the period in which they are incurred.
Non-Income Taxes
We are under audit by various domestic and foreign tax authorities with regards to non-income tax matters. The subject matter of non-income tax audits primarily arises from disputes on the tax treatment and tax rate applied to the sale of our products and services in these jurisdictions and the tax treatment of certain employee benefits. We accrue non-income taxes that may result from examinations by, or any negotiated agreements with, these tax authorities when a loss is probable and reasonably estimable. If we determine that a loss is reasonably possible and the loss or range of loss can be estimated, we disclose the reasonably possible loss. We believe these matters are without merit and we are defending ourselves vigorously. Due to the inherent complexity and uncertainty of these matters and judicial process in certain jurisdictions, the final outcome may be materially different from our expectations.
For information regarding income tax contingencies, see
Note 14
.
Note 11.
Stockholders’ Equity
Convertible Preferred Stock
Our board of directors has authorized
100 million
shares of convertible preferred stock,
$0.001
par value, issuable in series. As of
December 31,
2016
and
2017
,
no
shares were issued or outstanding.
Class A and Class B Common Stock and Class C Capital Stock
Our board of directors has authorized
three
classes of stock, Class A and Class B common stock, and Class C capital stock. The rights of the holders of each class of our common and capital stock are identical, except with respect to voting. Each share of Class A common stock is entitled to
one
vote per share. Each share of Class B common stock is entitled to
10
votes per share. Class C capital stock has
no
voting rights, except as required by applicable law. Shares of Class B common stock may be converted at any time at the option of the stockholder and automatically convert upon sale or transfer to Class A common stock.
Share Repurchases
In October 2015, the board of directors of Alphabet authorized the company to repurchase up to
$5.1 billion
of its Class C capital stock, commencing in the fourth quarter of 2015. In January 2016, the board of directors of Alphabet authorized the company to repurchase an additional amount of approximately
514,000
shares. The repurchases were executed, subject to general business and market conditions and other investment opportunities, through open market purchases or privately negotiated transactions, including through the use of 10b5-1 plans. During 2016, we repurchased and subsequently retired
5.2 million
shares of Alphabet Class C capital stock for an aggregate amount of
$3.7 billion
. We completed all authorized share repurchases under this repurchase program as of June 2016.
In October 2016, the board of directors of Alphabet authorized the company to repurchase up to
$7.0 billion
of its Class C capital stock. The repurchases are being executed from time to time, subject to general business and market conditions and other investment opportunities, through open market purchases or privately negotiated
transactions, including through Rule 10b5-1 plans. The repurchase program does not have an expiration date. During 2017, we repurchased and subsequently retired
5.2 million
shares of Alphabet Class C capital stock for an aggregate amount of
$4.8 billion
.
Note 12.
Net Income Per Share
We compute net income per share of Class A and Class B common stock and Class C capital stock using the two-class method. Basic net income per share is computed using the weighted-average number of shares outstanding during the period. Diluted net income per share is computed using the weighted-average number of shares and the effect of potentially dilutive securities outstanding during the period. Potentially dilutive securities consist of restricted stock units and other contingently issuable shares. The dilutive effect of outstanding restricted stock units and other contingently issuable shares is reflected in diluted earnings per share by application of the treasury stock method. The computation of the diluted net income per share of Class A common stock assumes the conversion of Class B common stock, while the diluted net income per share of Class B common stock does not assume the conversion of those shares.
The rights, including the liquidation and dividend rights, of the holders of our Class A and Class B common stock and Class C capital stock are identical, except with respect to voting. Furthermore, there are a number of safeguards built into our certificate of incorporation, as well as Delaware law, which preclude our board of directors from declaring or paying unequal per share dividends on our Class A and Class B common stock and Class C capital stock. Specifically, Delaware law provides that amendments to our certificate of incorporation which would have the effect of adversely altering the rights, powers, or preferences of a given class of stock must be approved by the class of stock adversely affected by the proposed amendment. In addition, our certificate of incorporation provides that before any such amendment may be put to a stockholder vote, it must be approved by the unanimous consent of our board of directors. As a result, the undistributed earnings for each year are allocated based on the contractual participation rights of the Class A and Class B common shares and Class C capital stock as if the earnings for the year had been distributed. As the liquidation and dividend rights are identical, the undistributed earnings are allocated on a proportionate basis. Furthermore, as we assume the conversion of Class B common stock in the computation of the diluted net income per share of Class A common stock, the undistributed earnings are equal to net income for that computation.
In the years ended December 31, 2016 and 2017, the net income per share amounts are the same for Class A and Class B common stock and Class C capital stock because the holders of each class are legally entitled to equal per share dividends or distributions in liquidation in accordance with the Amended and Restated Certificate of Incorporation of Alphabet Inc.
In the year ended December 31, 2015, the Class C Adjustment Payment was allocated to the numerator for calculating net income per share of Class C capital stock from net income available to all stockholders and the remaining undistributed earnings were allocated on a pro rata basis to Class A and Class B common stock and Class C capital stock based on the number of shares used in the per share computation for each class of stock. The weighted-average share impact of the Class C Adjustment Payment is included in the denominator of both basic and diluted net income per share computations for the year ended December 31, 2015.
The following table sets forth the computation of basic and diluted net income per share of Class A and Class B common stock and Class C capital stock (in millions, except share amounts which are reflected in thousands and per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2015
|
|
Class A
|
|
Class B
|
|
Class C
|
Basic net income per share:
|
|
|
|
|
|
Numerator
|
|
|
|
|
|
Adjustment Payment to Class C capital stockholders
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
522
|
|
Allocation of undistributed earnings
|
6,695
|
|
|
1,196
|
|
|
7,935
|
|
Total
|
$
|
6,695
|
|
|
$
|
1,196
|
|
|
$
|
8,457
|
|
Denominator
|
|
|
|
|
|
Number of shares used in per share computation
|
289,640
|
|
|
51,745
|
|
|
343,241
|
|
Basic net income per share
|
$
|
23.11
|
|
|
$
|
23.11
|
|
|
$
|
24.63
|
|
Diluted net income per share:
|
|
|
|
|
|
Numerator
|
|
|
|
|
|
Adjustment Payment to Class C capital stockholders
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
522
|
|
Allocation of undistributed earnings for basic computation
|
$
|
6,695
|
|
|
$
|
1,196
|
|
|
$
|
7,935
|
|
Reallocation of undistributed earnings as a result of conversion of Class B to Class A shares
|
1,196
|
|
|
0
|
|
|
0
|
|
Reallocation of undistributed earnings
|
(39
|
)
|
|
(14
|
)
|
|
39
|
|
Allocation of undistributed earnings
|
$
|
7,852
|
|
|
$
|
1,182
|
|
|
$
|
7,974
|
|
Denominator
|
|
|
|
|
|
Number of shares used in basic computation
|
289,640
|
|
|
51,745
|
|
|
343,241
|
|
Weighted-average effect of dilutive securities
|
|
|
|
|
|
Add:
|
|
|
|
|
|
Conversion of Class B to Class A common shares outstanding
|
51,745
|
|
|
0
|
|
|
0
|
|
Restricted stock units and other contingently issuable shares
|
2,395
|
|
|
0
|
|
|
5,909
|
|
Number of shares used in per share computation
|
343,780
|
|
|
51,745
|
|
|
349,150
|
|
Diluted net income per share
|
$
|
22.84
|
|
|
$
|
22.84
|
|
|
$
|
24.34
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2016
|
|
Class A
|
|
Class B
|
|
Class C
|
Basic net income per share:
|
|
|
|
|
|
Numerator
|
|
|
|
|
|
Allocation of undistributed earnings
|
$
|
8,332
|
|
|
$
|
1,384
|
|
|
$
|
9,762
|
|
Denominator
|
|
|
|
|
|
Number of shares used in per share computation
|
294,217
|
|
|
48,859
|
|
|
344,702
|
|
Basic net income per share
|
$
|
28.32
|
|
|
$
|
28.32
|
|
|
$
|
28.32
|
|
Diluted net income per share:
|
|
|
|
|
|
Numerator
|
|
|
|
|
|
Allocation of undistributed earnings for basic computation
|
$
|
8,332
|
|
|
$
|
1,384
|
|
|
$
|
9,762
|
|
Effect of dilutive securities in equity method investments and subsidiaries
|
(9
|
)
|
|
(2
|
)
|
|
(10
|
)
|
Allocation of undistributed earnings for diluted computation
|
8,323
|
|
|
1,382
|
|
|
9,752
|
|
Reallocation of undistributed earnings as a result of conversion of Class B to Class A shares
|
1,382
|
|
|
0
|
|
|
0
|
|
Reallocation of undistributed earnings
|
(94
|
)
|
|
(21
|
)
|
|
94
|
|
Allocation of undistributed earnings
|
$
|
9,611
|
|
|
$
|
1,361
|
|
|
$
|
9,846
|
|
Denominator
|
|
|
|
|
|
Number of shares used in basic computation
|
294,217
|
|
|
48,859
|
|
|
344,702
|
|
Weighted-average effect of dilutive securities
|
|
|
|
|
|
Add:
|
|
|
|
|
|
Conversion of Class B to Class A common shares outstanding
|
48,859
|
|
|
0
|
|
|
0
|
|
Restricted stock units and other contingently issuable shares
|
2,055
|
|
|
0
|
|
|
8,873
|
|
Number of shares used in per share computation
|
345,131
|
|
|
48,859
|
|
|
353,575
|
|
Diluted net income per share
|
$
|
27.85
|
|
|
$
|
27.85
|
|
|
$
|
27.85
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2017
|
|
Class A
|
|
Class B
|
|
Class C
|
Basic net income per share:
|
|
|
|
|
|
Numerator
|
|
|
|
|
|
Allocation of undistributed earnings
|
$
|
5,438
|
|
|
$
|
862
|
|
|
$
|
6,362
|
|
Denominator
|
|
|
|
|
|
Number of shares used in per share computation
|
297,604
|
|
|
47,146
|
|
|
348,151
|
|
Basic net income per share
|
$
|
18.27
|
|
|
$
|
18.27
|
|
|
$
|
18.27
|
|
Diluted net income per share:
|
|
|
|
|
|
Numerator
|
|
|
|
|
|
Allocation of undistributed earnings for basic computation
|
$
|
5,438
|
|
|
$
|
862
|
|
|
$
|
6,362
|
|
Reallocation of undistributed earnings as a result of conversion of Class B to Class A shares
|
862
|
|
|
0
|
|
|
0
|
|
Reallocation of undistributed earnings
|
(74
|
)
|
|
(14
|
)
|
|
74
|
|
Allocation of undistributed earnings
|
$
|
6,226
|
|
|
$
|
848
|
|
|
$
|
6,436
|
|
Denominator
|
|
|
|
|
|
Number of shares used in basic computation
|
297,604
|
|
|
47,146
|
|
|
348,151
|
|
Weighted-average effect of dilutive securities
|
|
|
|
|
|
Add:
|
|
|
|
|
|
Conversion of Class B to Class A common shares outstanding
|
47,146
|
|
|
0
|
|
|
0
|
|
Restricted stock units and other contingently issuable shares
|
1,192
|
|
|
0
|
|
|
9,491
|
|
Number of shares used in per share computation
|
345,942
|
|
|
47,146
|
|
|
357,642
|
|
Diluted net income per share
|
$
|
18.00
|
|
|
$
|
18.00
|
|
|
$
|
18.00
|
|
Note 13.
Compensation Plans
Stock Plans
Under our 2012 Stock Plan, RSUs or stock options may be granted. An RSU award is an agreement to issue shares of our publicly traded stock at the time the award vests. Incentive and non-qualified stock options, or rights to purchase common stock, are generally granted for a term of
10
years. RSUs granted to participants under the 2012 Stock Plan generally vest over
four
years contingent upon employment or service with us on the vesting date.
As of
December 31, 2017
, there were
38,505,768
shares of stock reserved for future issuance under our Stock Plan.
Stock-Based Compensation
For the years ended
December 31,
2015
,
2016
and
2017
, total stock-based compensation expense was
$5.3 billion
,
$6.9 billion
and
$7.9 billion
, including amounts associated with awards we expect to settle in Alphabet stock of
$5.2 billion
,
$6.7 billion
, and
$7.7 billion
, respectively.
For the years ended December 31, 2015, 2016 and 2017, we recognized tax benefits on total stock-based compensation expense, which are reflected in the provision for income taxes in the Consolidated Statements of Income, of
$1.1 billion
,
$1.5 billion
, and
$1.6 billion
, respectively.
For the years ended
December 31,
2015
,
2016
and
2017
, tax benefit realized related to awards vested or exercised during the period was
$1.5 billion
,
$2.1 billion
and
$2.7 billion
, respectively. These amounts do not include the indirect effects of stock-based awards, which primarily relate to the research and development tax credit.
Stock-Based Award Activities
The following table summarizes the activities for our unvested RSUs for the year ended
December 31, 2017
:
|
|
|
|
|
|
|
|
|
Unvested Restricted Stock Units
|
|
Number of
Shares
|
|
Weighted-
Average
Grant-Date
Fair Value
|
Unvested as of December 31, 2016
|
25,348,955
|
|
|
$
|
624.92
|
|
Granted
|
8,097,708
|
|
|
$
|
845.06
|
|
Vested
|
(12,071,413
|
)
|
|
$
|
623.94
|
|
Forfeited/canceled
|
(1,297,904
|
)
|
|
$
|
659.61
|
|
Unvested as of December 31, 2017
|
20,077,346
|
|
|
$
|
712.45
|
|
The weighted-average grant-date fair value of RSUs granted during the years ended
December 31,
2015
and
2016
, was
$546.46
and
$713.89
, respectively. Total fair value of RSUs, as of their respective vesting dates, during the years ended
December 31,
2015
,
2016
, and
2017
were
$6.9 billion
,
$9.0 billion
, and
$11.3 billion
, respectively.
As of
December 31, 2017
, there was
$12.9 billion
of unrecognized compensation cost related to unvested employee RSUs. This amount is expected to be recognized over a weighted-average period of
2.4 years
.
401(k) Plans
We have
two
401(k) Savings Plans that qualify as deferred salary arrangements under Section 401(k) of the Internal Revenue Code. Under these 401(k) Plans, matching contributions are based upon the amount of the employees’ contributions subject to certain limitations. We contributed approximately
$309 million
,
$385 million
, and
$448 million
for the years ended
December 31, 2015
,
2016
, and
2017
, respectively.
Note 14.
Income Taxes
Income from continuing operations before income taxes included income from domestic operations of
$8.3 billion
,
$12.0 billion
, and
$10.7 billion
for the years ended
December 31, 2015
,
2016
, and
2017
, and income from foreign operations of
$11.4 billion
,
$12.1 billion
, and
$16.5 billion
for the years ended
December 31, 2015
,
2016
, and
2017
.
The provision for income taxes consists of the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2015
|
|
2016
|
|
2017
|
Current:
|
|
|
|
|
|
Federal and state
|
$
|
2,838
|
|
|
$
|
3,826
|
|
|
$
|
12,608
|
|
Foreign
|
723
|
|
|
966
|
|
|
1,746
|
|
Total
|
3,561
|
|
|
4,792
|
|
|
14,354
|
|
Deferred:
|
|
|
|
|
|
Federal and state
|
(241
|
)
|
|
(70
|
)
|
|
220
|
|
Foreign
|
(17
|
)
|
|
(50
|
)
|
|
(43
|
)
|
Total
|
(258
|
)
|
|
(120
|
)
|
|
177
|
|
Provision for income taxes
|
$
|
3,303
|
|
|
$
|
4,672
|
|
|
$
|
14,531
|
|
The
U.S. Tax Cuts and Jobs Act (Tax Act)
was enacted on December 22, 2017 and introduces significant changes to U.S. income tax law. Effective in 2018, the Tax Act reduces the U.S. statutory tax rate from 35% to 21% and creates new taxes on certain foreign-sourced earnings and certain related-party payments, which are referred to as the global intangible low-taxed income tax and the base erosion tax, respectively. In addition, in 2017 we were subject to a one-time transition tax on accumulated foreign subsidiary earnings not previously subject to U.S. income tax.
Due to the timing of the enactment and the complexity involved in applying the provisions of the Tax Act, we have made reasonable estimates of the effects and recorded provisional amounts in our financial statements as of December 31, 2017. As we collect and prepare necessary data, and interpret the Tax Act and any additional guidance issued by the U.S. Treasury Department, the IRS, and other standard-setting bodies, we may make adjustments to the provisional amounts. Those adjustments may materially impact our provision for income taxes and effective tax rate in the period in which the adjustments are made. The accounting for the tax effects of the Tax Act will be completed in 2018.
Provisional amounts for the following income tax effects of the Tax Act have been recorded as of December 31, 2017 and are subject to change during 2018.
One-time transition tax
The Tax Act requires us to pay U.S. income taxes on accumulated foreign subsidiary earnings not previously subject to U.S. income tax at a rate of
15.5%
to the extent of foreign cash and certain other net current assets and
8%
on the remaining earnings. We recorded a provisional amount for our one-time transitional tax liability and income tax expense of
$10.2 billion
. We have recorded provisional amounts based on estimates of the effects of the Tax Act as the analysis requires significant data from our foreign subsidiaries that is not regularly collected or analyzed.
Deferred tax effects
The Tax Act reduces the U.S. statutory tax rate from
35%
to
21%
for years after 2017. Accordingly, we have remeasured our deferred taxes as of December 31, 2017 to reflect the reduced rate that will apply in future periods when these deferred taxes are settled or realized. We recognized a deferred tax benefit of
$376 million
to reflect the reduced U.S. tax rate and other effects of the Tax Act. Although the tax rate reduction is known, we have not collected the necessary data to complete our analysis of the effect of the Tax Act on the underlying deferred taxes and as such, the amounts recorded as of December 31, 2017 are provisional.
The net tax expense recognized in 2017 related to the Tax Act was
$9.9 billion
. As we complete our analysis of the Tax Act and incorporate additional guidance that may be issued by the U.S. Treasury Department, the IRS or other standard-setting bodies, we may identify additional effects not reflected as of December 31, 2017.
The reconciliation of federal statutory income tax rate to our effective income tax rate is as follows:
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2015
|
|
2016
|
|
2017
|
U.S. federal statutory tax rate
|
35.0
|
%
|
|
35.0
|
%
|
|
35.0
|
%
|
Foreign income taxed at different rates
|
(13.4
|
)%
|
|
(11.0
|
)%
|
|
(14.2
|
)%
|
Impact of the Tax Act
|
|
|
|
|
|
|
|
|
One-time transition tax
|
0.0
|
%
|
|
0.0
|
%
|
|
37.6
|
%
|
Deferred tax effects
|
0.0
|
%
|
|
0.0
|
%
|
|
(1.4
|
)%
|
Federal research credit
|
(2.1
|
)%
|
|
(2.0
|
)%
|
|
(1.8
|
)%
|
Stock-based compensation expense
|
0.3
|
%
|
|
(3.4
|
)%
|
|
(4.5
|
)%
|
European Commission Fine
|
0.0
|
%
|
|
0.0
|
%
|
|
3.5
|
%
|
Other adjustments
|
(3.0
|
)%
|
|
0.7
|
%
|
|
(0.8
|
)%
|
Effective tax rate
|
16.8
|
%
|
|
19.3
|
%
|
|
53.4
|
%
|
Our effective tax rate for each of the years presented was impacted by earnings realized in foreign jurisdictions with statutory tax rates lower than the federal statutory tax rate. Substantially all of the income from foreign operations was earned by an Irish subsidiary. Beginning in 2018, earnings realized in foreign jurisdictions will be subject to U.S. tax in accordance with the Tax Act.
On July 27, 2015, the United States Tax Court, in an opinion in Altera Corp. v. Commissioner, invalidated the portion of the Treasury regulations issued under IRC Section 482 requiring related-party participants in a cost sharing arrangement to share stock-based compensation costs. The U.S. Tax Court issued the final decision on December 28, 2015. The IRS served a Notice of Appeal on February 22, 2016 and the case is being heard by the Ninth Circuit Court of Appeals. At this time, the U.S. Treasury has not withdrawn the requirement to include stock-based compensation from its regulations. We have evaluated the opinion and continue to record a tax benefit related to reimbursement of cost share payments for the previously shared stock-based compensation costs. In accordance with the Tax Act, the Altera tax benefit was remeasured from 35% to 21%. We also remeasured the tax benefit expected to be realized upon settlement including the expected future new taxes enacted by the Tax Act due upon resolution of the matter. The tax liability recorded as of December 31, 2016 for the U.S. tax cost of the potential repatriation associated with the contingent foreign earnings was reversed due to the Tax Act introducing a territorial tax system and providing a 100% dividend received deduction on certain qualified dividends from foreign subsidiaries. We will continue to monitor developments related to the case and the potential impact on our consolidated financial statements.
Deferred Income Taxes
Deferred income taxes reflect the net effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. We recorded a provisional adjustment to our U.S. deferred income taxes as of December 31, 2017 to reflect the reduction in the U.S. statutory tax rate from
35%
to
21%
resulting from the Tax Act. Significant components of our deferred tax assets and liabilities are as follows (in millions):
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
2016
|
|
2017
|
Deferred tax assets:
|
|
|
|
Stock-based compensation expense
|
$
|
574
|
|
|
$
|
251
|
|
Accrued employee benefits
|
939
|
|
|
285
|
|
Accruals and reserves not currently deductible
|
500
|
|
|
717
|
|
Tax credits
|
631
|
|
|
1,187
|
|
Basis difference in investment of Arris
|
1,327
|
|
|
849
|
|
Prepaid cost sharing
|
4,409
|
|
|
498
|
|
Net Operating Losses
|
305
|
|
|
320
|
|
Other
|
621
|
|
|
379
|
|
Total deferred tax assets
|
9,306
|
|
|
4,486
|
|
Valuation allowance
|
(2,076
|
)
|
|
(2,531
|
)
|
Total deferred tax assets net of valuation allowance
|
7,230
|
|
|
1,955
|
|
Deferred tax liabilities:
|
|
|
|
Depreciation and amortization
|
(877
|
)
|
|
(551
|
)
|
Identified intangibles
|
(844
|
)
|
|
(419
|
)
|
Renewable energy investments
|
(788
|
)
|
|
(531
|
)
|
Foreign earnings
|
(4,409
|
)
|
|
(68
|
)
|
Other
|
(155
|
)
|
|
(136
|
)
|
Total deferred tax liabilities
|
(7,073
|
)
|
|
(1,705
|
)
|
Net deferred tax assets
|
$
|
157
|
|
|
$
|
250
|
|
As of
December 31, 2017
, our federal and state net operating loss carryforwards for income tax purposes were approximately
$931 million
and
$785 million
, respectively. If not utilized, the federal net operating loss carryforwards will begin to expire in 2021 and the state net operating loss carryforwards will begin to expire in 2018. It is more likely than not that certain federal net operating loss carryforwards and our state net operating loss carryforwards will not be realized; therefore, we have recorded a valuation allowance against them. The net operating loss carryforwards are subject to various annual limitations under the tax laws of the different jurisdictions. Our foreign net operating loss carryforwards for income tax purposes were
$327 million
that will begin to expire in 2021.
As of
December 31, 2017
, our California research and development credit carryforwards for income tax purposes were approximately
$1.8 billion
that can be carried over indefinitely. We believe the state tax credit is not likely to be realized.
As of
December 31, 2017
, we maintained a valuation allowance with respect to certain of our deferred tax assets relating primarily to investment losses that are capital in nature, California deferred tax assets, certain federal net operating losses, and certain foreign net operating losses that we believe are not likely to be realized. We established a deferred tax asset for the book-to-tax basis difference in our investments in Arris shares received from the sale of the Motorola Home business to Arris in 2013. Since any future losses to be recognized upon the sale of Arris shares will be capital losses, a valuation allowance has been recorded against this deferred tax asset to the extent such deferred tax asset is not likely to be covered by capital gains generated as of December 31, 2017. We reassess the valuation allowance quarterly and if future evidence allows for a partial or full release of the valuation allowance, a tax benefit will be recorded accordingly.
Uncertain Tax Positions
The following table summarizes the activity related to our gross unrecognized tax benefits from January 1,
2015
to
December 31, 2017
(in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2015
|
|
2016
|
|
2017
|
Beginning gross unrecognized tax benefits
|
$
|
3,294
|
|
|
$
|
4,167
|
|
|
$
|
5,393
|
|
Increases related to prior year tax positions
|
224
|
|
|
899
|
|
|
685
|
|
Decreases related to prior year tax positions
|
(176
|
)
|
|
(157
|
)
|
|
(257
|
)
|
Decreases related to settlement with tax authorities
|
(27
|
)
|
|
(196
|
)
|
|
(1,875
|
)
|
Increases related to current year tax positions
|
852
|
|
|
680
|
|
|
750
|
|
Ending gross unrecognized tax benefits
|
$
|
4,167
|
|
|
$
|
5,393
|
|
|
$
|
4,696
|
|
The total amount of gross unrecognized tax benefits was
$4.2 billion
,
$5.4 billion
, and
$4.7 billion
as of
December 31, 2015
,
2016
, and
2017
, respectively, of which,
$3.6 billion
,
$4.3 billion
, and
$3.0 billion
if recognized, would affect our effective tax rate. The decrease in gross unrecognized tax benefits in 2017 was primarily as a result of the resolution of a multi-year U.S. audit.
As of
December 31, 2016
and
2017
, we had accrued
$493 million
and
$362 million
in interest and penalties in provision for income taxes, respectively.
We file income tax returns in the U.S. federal jurisdiction and in many state and foreign jurisdictions, our
two
major tax jurisdictions are the U.S. federal and Ireland. We are subject to the continuous examination of our income tax returns by the IRS and other tax authorities. The IRS completed its examination through our 2012 tax years; all issues have been concluded except for
one
which is currently under review in the U.S. Tax Court. The IRS is currently examining our 2013 through 2015 tax returns. We have also received tax assessments in multiple foreign jurisdictions asserting transfer pricing adjustments or permanent establishment. We continue to defend any and all such claims as presented.
Our 2016 tax year remains subject to examination by the IRS for U.S. federal tax purposes, and our 2011 through 2016 tax years remain subject to examination by the appropriate governmental agencies for Irish tax purposes. There are other ongoing audits in various other jurisdictions that are not material to our financial statements.
We regularly assess the likelihood of adverse outcomes resulting from these examinations to determine the adequacy of our provision for income taxes. We continue to monitor the progress of ongoing discussions with tax authorities and the impact, if any, of the expected expiration of the statute of limitations in various taxing jurisdictions.
We believe that an adequate provision has been made for any adjustments that may result from tax examinations. However, the outcome of tax audits cannot be predicted with certainty. If any issues addressed in our tax audits are resolved in a manner not consistent with management's expectations, we could be required to adjust our provision for income taxes in the period such resolution occurs. Although the timing of resolution, settlement, closure of audits is not certain, it is reasonably possible that certain U.S. federal and non-U.S. tax audits may be concluded within the next 12 months, which could significantly increase or decrease the balance of our gross unrecognized tax benefits.
We estimate that our unrecognized tax benefits as of December 31, 2017 could possibly decrease by approximately
$500 million
in the next 12 months. Positions that may be resolved include various U.S. and non-U.S. matters.
Note 15.
Information about Segments and Geographic Areas
We operate our business in multiple operating segments. Google is our only reportable segment. None of our other segments meet the quantitative thresholds to qualify as reportable segments; therefore, the other operating segments are combined and disclosed as Other Bets.
Our reported segments are:
|
|
•
|
Google – Google includes our main products such as Ads, Android, Chrome, Commerce, Google Cloud, Google Maps, Google Play, Hardware, Search, and YouTube. Our technical infrastructure and some newer efforts like virtual reality are also included in Google. Google generates revenues primarily from advertising; sales of apps, in-app purchases, digital content products, and hardware; and licensing and service fees, including fees received for Google Cloud offerings.
|
|
|
•
|
Other Bets – Other Bets is a combination of multiple operating segments that are not individually material. Other Bets includes businesses such as Access, Calico, CapitalG, GV, Nest, Verily, Waymo, and X.
Revenues
|
from the Other Bets are derived primarily through the sales of internet and TV services through Fiber, sales of Nest products and services, and licensing and R&D services through Verily.
Revenues, cost of revenues, and operating expenses are generally directly attributed to our segments. Inter-segment revenues are not presented separately, as these amounts are immaterial. Our Chief Operating Decision Maker does not evaluate operating segments using asset information.
Information about segments during the periods presented were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2015
|
|
2016
|
|
2017
|
Revenues:
|
|
|
|
|
|
Google
|
$
|
74,544
|
|
|
$
|
89,463
|
|
|
$
|
109,652
|
|
Other Bets
|
445
|
|
|
809
|
|
|
1,203
|
|
Total revenues
|
$
|
74,989
|
|
|
$
|
90,272
|
|
|
$
|
110,855
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2015
|
|
2016
|
|
2017
|
Operating income (loss):
|
|
|
|
|
|
Google
|
$
|
23,319
|
|
|
$
|
27,892
|
|
|
$
|
32,908
|
|
Other Bets
|
(3,456
|
)
|
|
(3,578
|
)
|
|
(3,355
|
)
|
Reconciling items
(1)
|
(503
|
)
|
|
(598
|
)
|
|
(3,407
|
)
|
Total income from operations
|
$
|
19,360
|
|
|
$
|
23,716
|
|
|
$
|
26,146
|
|
|
|
(1)
|
Reconciling items are primarily comprised of the European Commission fine for the year ended December 31, 2017, as well as corporate administrative costs and other miscellaneous items that are not allocated to individual segments for all periods presented.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2015
|
|
2016
|
|
2017
|
Capital expenditures:
|
|
|
|
|
|
Google
|
$
|
8,868
|
|
|
$
|
9,417
|
|
|
$
|
12,605
|
|
Other Bets
|
850
|
|
|
1,385
|
|
|
507
|
|
Reconciling items
(2)
|
232
|
|
|
(590
|
)
|
|
72
|
|
Total capital expenditures as presented on the Consolidated Statements of Cash Flows
|
$
|
9,950
|
|
|
$
|
10,212
|
|
|
$
|
13,184
|
|
|
|
(2)
|
Reconciling items are related to timing differences of payments as segment capital expenditures are on accrual basis while total capital expenditures shown on the Consolidated Statements of Cash Flow are on cash basis and other miscellaneous differences.
|
Stock-based compensation (SBC) and depreciation, amortization, and impairment are included in segment operating income (loss) as shown below (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2015
|
|
2016
|
|
2017
|
Stock-based compensation:
|
|
|
|
|
|
Google
|
$
|
4,610
|
|
|
$
|
5,926
|
|
|
$
|
7,038
|
|
Other Bets
|
475
|
|
|
647
|
|
|
493
|
|
Reconciling items
(3)
|
118
|
|
|
130
|
|
|
148
|
|
Total stock-based compensation
(4)
|
$
|
5,203
|
|
|
$
|
6,703
|
|
|
$
|
7,679
|
|
|
|
|
|
|
|
Depreciation, amortization, and impairment:
|
|
|
|
|
|
Google
|
$
|
4,839
|
|
|
$
|
5,800
|
|
|
$
|
6,520
|
|
Other Bets
|
203
|
|
|
340
|
|
|
395
|
|
Reconciling items
(5)
|
21
|
|
|
4
|
|
|
—
|
|
Total depreciation, amortization, and impairment as presented on the Consolidated Statements of Cash Flows
|
$
|
5,063
|
|
|
$
|
6,144
|
|
|
$
|
6,915
|
|
|
|
(3)
|
Reconciling items represent corporate administrative costs that are not allocated to individual segments.
|
|
|
(4)
|
For purposes of segment reporting, SBC represents awards
that we expect to settle in Alphabet stock.
|
|
|
(5)
|
Reconciling items are primarily related to corporate administrative costs and other miscellaneous items that are not allocated to individual segments.
|
The following table presents our long-lived assets by geographic area (in millions):
|
|
|
|
|
|
|
|
|
|
As of
December 31, 2016
|
|
As of
December 31, 2017
|
Long-lived assets:
|
|
|
|
United States
|
$
|
47,383
|
|
|
$
|
55,113
|
|
International
|
14,706
|
|
|
17,874
|
|
Total long-lived assets
|
$
|
62,089
|
|
|
$
|
72,987
|
|
For revenues by geography, see
Note 2
.