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MarketScreener Homepage  >  Equities  >  Nyse  >  Visa Inc.    V

VISA INC.

(V)
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01/14VISA INC. : to Announce Fiscal First Quarter 2021 Financial Results on January 28, 2021
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01/14VISA : Transcript ( PDF 262 KB )
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VISA : Management's Discussion and Analysis of Financial Condition and Results of Operations (form 10-K)

11/19/2020 | 04:07pm EST
This management's discussion and analysis provides a review of the results of
operations, financial condition and liquidity and capital resources of Visa Inc.
and its subsidiaries ("Visa," "we," "us," "our" and the "Company") on a
historical basis and outlines the factors that have affected recent earnings, as
well as those factors that may affect future earnings. The following discussion
and analysis should be read in conjunction with the consolidated financial
statements and related notes included in Item 8-Financial Statements and
Supplementary Data of this report.
This section of this Form 10-K generally discusses fiscal 2020 compared to
fiscal 2019. Discussions of fiscal 2019 compared to 2018 that are not included
in this Form 10-K can be found in "Management's Discussion and Analysis of
Financial Condition and Results of Operations" in Part II, Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations in our
fiscal 2019 Form 10-K, filed with the United States Securities and Exchange
Commission on November 14, 2019.
Overview
Visa is a global payments technology company that enables innovative, secure and
reliable electronic payments across more than 200 countries and territories. We
facilitate digital payments across a global network of consumers, merchants,
financial institutions, businesses, strategic partners and government entities
through innovative technologies. Our advanced transaction processing network,
VisaNet, enables authorization, clearing and settlement of payment transactions
and allows us to provide our financial institution and merchant clients a wide
range of products, platforms and value added services.
Financial overview. Our as-reported U.S. GAAP and non-GAAP net income and
diluted earnings per share are as follows:
                                                           For the Years Ended
                                                              September 30,                                       % Change(1)
                                                                                                            2020                  2019
                                                                                                            vs.                   vs.
                                                2020                2019              2018                  2019                  2018
                                                                (in millions, except percentages and per share data)
Net income, as reported                    $     10,866$ 12,080$ 10,301                      (10) %              17  %

Diluted earnings per share, as reported $ 4.89$ 5.32

        $   4.42                       (8) %              20  %

Non-GAAP net income(2)                     $     11,193$ 12,274$ 10,656                       (9) %              15  %

Non-GAAP diluted earnings per share(2) $ 5.04$ 5.40

        $   4.58                       (7) %              18  %


(1)Figures in the table may not recalculate exactly due to rounding. Percentage
changes are calculated based on unrounded numbers.
(2)For a full reconciliation of our non-GAAP financial results, see tables in
Non-GAAP financial results below.
Coronavirus. COVID-19 continues to have an impact globally. While we have been
actively monitoring the worldwide spread of COVID-19, the extent to which
COVID-19 will ultimately impact our business remains difficult to predict. Our
priority remains the safety of our employees, clients and the communities in
which we live and operate. We are taking a measured approach in bringing our
employees back in the office and will continue to have most of our employees
work remotely for the rest of 2020. We continue to remain in close and regular
contact with our employees, clients, partners and governments globally to help
them navigate these challenging times.

Revenues in the latter half of fiscal 2020 were impacted by declines in volumes
and transactions as a result of COVID-19, although we are exiting the year with
improved results and most countries had stable to positive year-over-year
domestic spending growth in the fiscal fourth quarter. Cross-border volume
however, remained depressed, led by travel spending, as the majority of borders
remain closed. While we have taken measures to modify our business practices and
reduce operating expenses, including scaling back hiring plans, restricting
travel, lowering marketing spend and the use of external resources, the impact
that COVID-19 will have on our business remains difficult to predict due to
numerous uncertainties, including the transmissibility, severity and duration of
the outbreak, the effectiveness of social distancing measures or actions that
are voluntarily adopted by the public or required by governments or public
health authorities, the development and availability of effective treatments or
vaccines, and the impact to our employees and our operations, the business of
our clients, supplier and business partners, and other factors identified in
Part I, Item 1A "Risk Factors" in this Form 10-K. We will continue to evaluate
the nature and extent of the impact to our business.
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Highlights for fiscal 2020. Net revenues for fiscal 2020 were $21.8 billion, a
decrease of 5% over the prior year, primarily due to the year-over-year changes
payments volume, cross-border volume and processed transactions, which were
impacted by the spread of COVID-19 globally starting in the latter part of March
2020. Exchange rate movements in fiscal 2020, partially mitigated by our hedging
program, negatively impacted our net revenues growth by approximately half a
percentage point.
Total operating expenses for fiscal 2020 were $7.8 billion on a GAAP basis, and
decreased 3% over the prior year, driven by lower litigation provision and our
overall cost reduction strategy, offset by higher personnel and depreciation and
amortization from our ongoing investments in support of our strategy for future
growth. Total operating expenses for fiscal 2020 were $7.7 billion on a non-GAAP
basis, and increased 1% over the prior year primarily driven by higher
personnel, offset by our overall cost reduction strategy.
Non-GAAP financial results. We use non-GAAP financial measures of our
performance which exclude certain items which we believe are not representative
of our continuing operations, as they may be non-recurring or have no cash
impact, and may distort our longer-term operating trends. We consider non-GAAP
measures useful to investors because they provide greater transparency into
management's view and assessment of our ongoing operating performance. Starting
in fiscal 2020, we revised our non-GAAP methodology to also exclude the impact
of gains and losses on our equity investments, amortization of acquired
intangible assets and acquisition-related costs for acquisitions that closed in
fiscal 2019 and subsequent periods. Prior year amounts have been restated to
conform to our current presentation.
•Gains and losses on equity investments. Gains and losses on equity investments
include periodic non-cash fair value adjustments and gains and losses upon sale
of an investment. These long-term investments are strategic in nature and are
primarily private company investments. Gains and losses and the related tax
impacts associated with these investments are tied to the performance of the
companies that we invest in and therefore do not correlate to the underlying
performance of our business.

•Amortization of acquired intangible assets. Amortization of acquired intangible
assets consists of amortization of intangible assets such as developed
technology, customer relationships and brands acquired in connection with
business combinations executed beginning in fiscal 2019. Amortization charges
for our acquired intangible assets are non-cash and are significantly affected
by the timing, frequency and size of our acquisitions, rather than our core
operations. As such, we have excluded this amount and the related tax impact to
facilitate an evaluation of our current operating performance and comparison to
our past operating performance.

•Acquisition-related costs. Acquisition-related costs consist primarily of
one-time transaction and integration costs associated with our business
combinations. These costs include professional fees, technology integration
fees, restructuring activities and other direct costs related to the purchase
and integration of acquired entities. It also includes retention equity and
deferred equity compensation when they are agreed upon as part of the purchase
price of the transaction but are required to be recognized as expense
post-combination. We have excluded these amounts and the related tax impacts as
the expenses are recognized for a limited duration and do not reflect the
underlying performance of our business.
•Litigation provision. During fiscal 2019 and 2018, we recorded a litigation
provision of $370 million and $600 million, respectively, and related tax
benefits of $83 million and $137 million, respectively, associated with the
interchange multidistrict litigation. The tax impact is determined by applying
applicable federal and state tax rates to the litigation provision. Under the
U.S. retrospective responsibility plan, we recover the monetary liabilities
related to the U.S. covered litigation through a reduction to the conversion
rate of our class B common stock to shares of class A common stock. See Note
5-U.S. and Europe Retrospective Responsibility Plans and Note 20-Legal Matters
to our consolidated financial statements included in Item 8-Financial Statements
and Supplementary Data of this report.
•Charitable contributions. During fiscal 2018, we donated investment securities
to the Visa Foundation and recognized a non-cash general and administrative
expense of $195 million, before tax, and recorded $193 million of realized gain
on the donation of these investments as non-operating income. Net of the related
cash tax benefit of $51 million, determined by applying applicable tax rates,
non-GAAP net income decreased by $49 million.
•Remeasurement of deferred tax balances. During fiscal 2020, in connection with
the UK enacted legislation that repealed the previous tax rate reduction from
19% to 17% that was effective on April 1, 2020, we
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remeasured our net deferred tax liabilities as of the enactment date, resulting
in the recognition of a non-recurring, non-cash income tax expense of $329
million. During fiscal 2018, in connection with the Tax Cuts and Jobs Act (the
"Tax Act") reduction of the corporate income tax rate, we remeasured our net
deferred tax liabilities as of the enactment date, resulting in the recognition
of a non-recurring, non-cash income tax benefit of $1.1 billion. See Note
19-Income Taxes to our consolidated financial statements included in Item
8-Financial Statements and Supplementary Data of this report.
•Transition tax on foreign earnings. During fiscal 2018, in connection with the
Tax Act requirement that we include certain untaxed foreign earnings of non-U.S.
subsidiaries in our fiscal 2018 taxable income, we recorded a one-time
transition tax estimate of approximately $1.1 billion. See Note 19-Income Taxes
to our consolidated financial statements included in Item 8-Financial Statements
and Supplementary Data of this report.
•Resolution of a tax item. During fiscal 2020, we resolved a long-outstanding
tax matter, dating back more than 12 years, relating to certain tax filing
positions taken prior to our initial public offering. The resolution of this
matter resulted in the recognition of a one-time charge to income tax expense of
$28 million, which we believe is not representative of our continuing operations
and ongoing effective tax rate.
Non-GAAP operating expenses, non-operating income (expense), income tax
provision, effective income tax rate, net income and diluted earnings per share
should not be relied upon as substitutes for measures calculated in accordance
with U.S. GAAP. The following tables reconcile our as-reported financial
measures, calculated in accordance with U.S. GAAP, to the respective non-GAAP
financial measures:
                                                                                             For the Year Ended
                                                                                             September 30, 2020
                                                                                                                                                           Diluted
                                        Operating             Non-operating            Income Tax         Effective Income                              Earnings Per
                                         Expenses           Income (Expense)           Provision             Tax Rate(1)            Net Income            Share(1)
                                                                            

(in millions, except percentages and per share data) As reported

                           $     7,765          $           (291)         $     2,924                    21.2  %       $    10,866$       4.89
(Gains) Losses on equity investments,
net                                             -                      (101)                 (23)                                         (78)                (0.04)
Amortization of acquired intangible
assets                                        (46)                        -                   11                                           35                  0.02
Acquisition-related costs                     (17)                        -                    4                                           13                  0.01
Remeasurement of deferred tax
balances                                        -                         -                 (329)                                         329                  0.15
Resolution of a tax item                        -                         -                  (28)                                          28                  0.01
Non-GAAP                              $     7,702          $           (392)         $     2,559                    18.6  %       $    11,193$       5.04



                                                                                             For the Year Ended
                                                                                             September 30, 2019
                                                                                                                                                           Diluted
                                        Operating             Non-operating            Income Tax         Effective Income                              Earnings Per
                                         Expenses           Income (Expense)           Provision             Tax Rate(1)            Net Income            Share(1)
                                                                            

(in millions, except percentages and per share data) As reported

                           $     7,976          $           (117)         $     2,804                    18.8  %       $    12,080$       5.32
(Gains) Losses on equity investments,
net                                             -                      (131)                 (30)                                        (101)                (0.04)
Amortization of acquired intangible
assets                                         (6)                        -                    1                                            5                     -
Acquisition-related costs                      (4)                        -                    1                                            3                     -
Litigation provision                         (370)                        -                   83                                          287                  0.13
Non-GAAP                              $     7,596          $           (248)         $     2,859                    18.9  %       $    12,274$       5.40



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                                                                                        For the Year Ended
                                                                                        September 30, 2018
                                                                                                                                                      Diluted
                                   Operating             Non-operating            Income Tax         Effective Income                              Earnings Per
                                    Expenses           Income (Expense)           Provision             Tax Rate(1)            Net Income            Share(1)
                                                                       (in millions, except percentages and per share data)
As reported                      $     7,655          $           (148)         $     2,505                    19.6  %       $    10,301$       4.42
(Gains) Losses on equity
investments, net                           -                       (98)                 (25)                                         (73)                (0.03)
Charitable contribution                 (195)                     (193)                  51                                          (49)                (0.02)
Litigation provision                    (600)                        -                  137                                          463                  0.20
Remeasurement of deferred tax
balances                                   -                         -                1,133                                       (1,133)                (0.49)
Transition tax on foreign
earnings                                   -                         -               (1,147)                                       1,147                  0.49
Non-GAAP                         $     6,860          $           (439)         $     2,654                    20.3  %       $    10,656$       4.58


(1)Figures in the table may not recalculate exactly due to rounding. Effective
income tax rate, diluted earnings per share and their respective totals are
calculated based on unrounded numbers.
Release of preferred stock. In September 2020, we released $7.3 billion of the
as-converted value from our series B and C preferred stock (alternatively
referred to as UK&I and Europe preferred stock, respectively) and issued 374,819
shares of series A preferred stock in connection with the first mandatory
release assessment, as required by the litigation management deed entered into
at the time of the Visa Europe acquisition. See Note 5-U.S. and Europe
Retrospective Responsibility Plans and Note 15-Stockholders' Equity to our
consolidated financial statements included in Item 8-Financial Statements and
Supplementary Data of this report.
Common stock repurchases. In January 2020, our board of directors authorized a
$9.5 billion share repurchase program (the "January 2020 Program"). During
fiscal 2020, we repurchased 44 million shares of our class A common stock in the
open market for $8.1 billion. As of September 30, 2020, our January 2020 Program
had remaining authorized funds of $5.5 billion for share repurchase. See Note
15-Stockholders' Equity to our consolidated financial statements included in
Item 8-Financial Statements and Supplementary Data of this report.
Senior notes. In fiscal 2020, we issued fixed-rate senior notes in public
offerings in an aggregate principal amount of $7.3 billion with maturities
ranging between 7 and 30 years. See Note 10-Debt to our consolidated financial
statements included in Item 8-Financial Statements and Supplementary Data of
this report.
Acquisition. On January 13, 2020, we entered into a definitive agreement to
acquire Plaid Inc. for $5.3 billion. We will pay approximately $4.9 billion of
cash and $0.4 billion of retention equity and deferred equity consideration.
This acquisition is subject to customary closing conditions, including
regulatory reviews and approvals.
On November 5, 2020, the U.S. Department of Justice filed a complaint in the
U.S. District Court for the Northern District of California seeking a permanent
injunction to prevent Visa from acquiring Plaid, alleging that the proposed
acquisition would substantially lessen competition in violation of Section 7 of
the Clayton Act and would constitute monopolization under Section 2 of the
Sherman Act. Visa intends to vigorously defend the lawsuit. See Note
2-Acquisitions and Note 20-Legal Matters to our consolidated financial
statements included in Item 8-Financial Statements and Supplementary Data of
this report.
Payments volume and processed transactions. Payments volume is the primary
driver for our service revenues, and the number of processed transactions is the
primary driver for our data processing revenues.

Nominal payments volume growth in the U.S. for the 12 months ended June 30, 2020
and 2019 was 4% and 10%, respectively. The decrease in nominal international
payments volume of 1% for the 12 months ended June 30, 2020(1) was negatively
impacted by the overall strengthening of the U.S. dollar. On a constant-dollar
basis, which excludes the impact of exchange rate movements, our international
payments volume growth for the 12 months ended June 30, 2020 and 2019 was 2% and
9%, respectively. Growth in processed transactions reflects the ongoing
worldwide shift to electronic payments, partially offset by the impact of
COVID-19.
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The following tables present nominal payments and cash volume:
                                                        U.S.                                                  International                                               Visa Inc.
                                                      12 months                                                 12 months                                                 12 months
                                                  ended June 30,(1)                                         ended June 30,(1)                                         ended June 30,(1)
                                                                            %                                                         %                                                         %
                                     2020              2019             Change(2)              2020              2019             Change(2)             2020              2019              Change(2)
                                                                                                    (in billions, except percentages)
Nominal payments volume
Consumer credit                  $   1,518$ 1,540                    (1) %       $   2,361$ 2,484                    (5) %       $  3,879$  4,025                    (4) %
Consumer debit(3)                    1,851            1,699                     9  %           1,974            1,877                     5  %          3,824             3,576                     7  %
Commercial(4)                          641              634                     1  %             369              381                    (3) %          1,010             1,015                     -  %
Total nominal payments volume(2) $   4,009$ 3,873                     4  %       $   4,704$ 4,742                    (1) %       $  8,713$  8,615                     1  %
Cash volume                            573              573                     -  %           2,046            2,261                    (9) %          2,620             2,834                    (8) %
Total nominal volume(2),(5)      $   4,583$ 4,447                     3  %       $   6,750$ 7,003                    (4) %       $ 11,333$ 11,450                    (1) %


                                                        U.S.                                                  International                                               Visa Inc.
                                                      12 months                                                 12 months                                                 12 months
                                                  ended June 30,(1)                                         ended June 30,(1)                                         ended June 30,(1)
                                                                            %                                                         %                                                         %
                                     2019              2018             Change(2)              2019              2018             Change(2)             2019              2018              Change(2)
                                                                                                    (in billions, except percentages)
Nominal payments volume
Consumer credit                  $   1,540$ 1,441                     7  %       $   2,484$ 2,455                     1  %       $  4,025$  3,897                     3  %
Consumer debit(3)                    1,699            1,521                    12  %           1,877            1,792                     5  %          3,576             3,313                     8  %
Commercial(4)                          634              564                    12  %             381              364                     5  %          1,015               927                     9  %
Total nominal payments volume(2) $   3,873$ 3,526                    10  %       $   4,742$ 4,611                     3  %       $  8,615$  8,137                     6  %
Cash volume                            573              563                     2  %           2,261            2,437                    (7) %          2,834             3,000                    (6) %
Total nominal volume(2),(5)      $   4,447$ 4,089                     9  %       $   7,003$ 7,048                    (1) %       $ 11,450$ 11,137                     3  %


The following table presents the change in nominal and constant payments and
cash volume:
                                                                       International                                                                                         Visa Inc.
                                              12 months ended                                   12 months ended                                    12 months ended                                   12 months ended
                                                  June 30,                                          June 30,                                          June 30,                                           June 30,
                                              2020 vs 2019(1)                                   2019 vs 2018(1)                                    2020 vs 2019(1)                                   2019 vs 2018(1)
                                      Nominal                 Constant(6)               Nominal              Constant(6)                  Nominal                  Constant(6)               Nominal              Constant(6)
Payments volume growth
Consumer credit growth                         (5) %                    (2) %                  1  %                     8  %                        (4) %                    (2) %                  3  %                     7  %
Consumer debit growth(3)                        5  %                     9  %                  5  %                    11  %                         7  %                     9  %                  8  %                    11  %
Commercial growth(4)                           (3) %                     -  %                  5  %                    13  %                         -  %                     1  %                  9  %                    12  %
Total payments volume
growth(2)                                      (1) %                     2  %                  3  %                     9  %                         1  %                     3  %                  6  %                    10  %
Cash volume growth                             (9) %                    (6) %                 (7) %                     -  %                        (8) %                    (5) %                 (6) %                     -  %
Total volume growth(2)                         (4) %                    (1) %                 (1) %                     6  %                        (1) %                     1  %                  3  %                     7  %


(1)Service revenues in a given quarter are assessed based on nominal payments
volume in the prior quarter. Therefore, service revenues reported for the 12
months ended September 30, 2020, 2019 and 2018, were based on nominal payments
volume reported by our financial institution clients for the 12 months ended
June 30, 2020, 2019 and 2018, respectively.
(2)Figures in the tables may not recalculate exactly due to rounding. Percentage
changes and totals are calculated based on unrounded numbers.
(3)Includes consumer prepaid volume and interlink volume.
(4)Includes large, medium and small business credit and debit, as well as
commercial prepaid volume.
(5)Total nominal volume is the sum of total nominal payments volume and cash
volume. Total nominal payments volume is the total monetary value of
transactions for goods and services that are purchased on cards carrying the
Visa, Visa Electron, Interlink and V PAY brands. Cash volume generally consists
of cash access transactions, balance access transactions, balance transfers and
convenience checks. Total nominal volume is provided by our financial
institution clients, subject to review by Visa. On occasion, previously
presented volume information may be updated. Prior period updates are not
material.
(6)Growth on a constant-dollar basis excludes the impact of foreign currency
fluctuations against the U.S. dollar.
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The following table provides the number of transactions involving cards and
other form factors carrying the Visa, Visa Electron, Interlink, VPAY and PLUS
cards processed on Visa's networks:
                                                                           For the Years Ended
                                                                              September 30,                                                % Change(1)
                                                                                                                                     2020                 2019
                                                                                                                                      vs.                  vs.
                                                        2020                       2019                      2018                    2019                 2018
                                                                                         (in millions, except percentages)
Visa processed transactions                             140,839                    138,329                    124,320                       2  %             11  %


(1)Figures in the table may not recalculate exactly due to rounding. Percentage
changes are calculated based on unrounded numbers. On occasion, previously
presented information may be updated. Prior period updates are not material.
Financial Information Presentation
Net Revenues
Our net revenues are primarily generated from payments volume on Visa products
for purchased goods and services, as well as the number of transactions
processed on our network. We do not earn revenues from, or bear credit risk with
respect to, interest or fees paid by account holders on Visa products. Our
issuing clients have the responsibility for issuing cards and other payment
products and determining the interest rates and fees paid by account holders. We
generally do not earn revenues from the fees that merchants are charged for
acceptance by acquirers, including the merchant discount rate. Our acquiring
clients are generally responsible for soliciting merchants as well as
establishing and earning these fees.
The following sets forth the components of our net revenues:
Service revenues consist mainly of revenues earned for services provided in
support of client usage of Visa payment services. Current quarter service
revenues are primarily assessed using a calculation of current quarter's pricing
applied to the prior quarter's payments volume. Service revenues also include
assessments designed to support ongoing acceptance and volume growth
initiatives, which are recognized in the same period the related volumes are
transacted.
Data processing revenues are earned for authorization, clearing, settlement,
value added services, network access and other maintenance and support services
that facilitate transaction and information processing among our clients
globally. Data processing revenues are recognized in the same period the related
transactions occur or services are performed.
International transaction revenues are earned for cross-border transaction
processing and currency conversion activities. Cross-border transactions arise
when the country of origin of the issuer, or financial institution originating
the transaction, is different from that of the beneficiary. International
transaction revenues are recognized in the same period the cross-border
transactions occur or services are performed.
Other revenues consist mainly of value added services, license fees for use of
the Visa brand or technology, fees for account holder services, certification,
licensing and product enhancements, such as extended account holder protection
and concierge services. Other revenues are recognized in the same period the
related transactions occur or services are performed.
Client incentives consist of incentives provided in contracts with financial
institution clients, merchants and strategic partners for various programs
designed to grow payments volume, increase Visa product acceptance, win merchant
routing transactions over our network and drive innovation. These incentives are
primarily accounted for as reductions to revenues.
Operating Expenses
Personnel expenses include salaries, employee benefits, incentive compensation,
share-based compensation, severance charges and contractor expense.
Marketing expenses include expenses associated with advertising and marketing
campaigns, sponsorships and other related promotions of the Visa brand.
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Network and processing expenses mainly represent expenses for the operation of
our processing network, including maintenance, equipment rental and fees for
other data processing services.
Professional fees mainly consist of fees for consulting, legal and other
professional services.
Depreciation and amortization expenses include depreciation expense for property
and equipment, as well as amortization of purchased and internally developed
software. Also included in this amount is amortization of finite-lived
intangible assets primarily obtained through acquisitions.
General and administrative expenses consist mainly of product enhancements,
facilities costs, travel activities, indirect taxes, foreign exchange gains and
losses and other corporate expenses incurred in support of our business.
Litigation provision represents litigation expenses and is based on management's
understanding of our litigation profile, the specifics of the cases, advice of
counsel to the extent appropriate and management's best estimate of incurred
loss.
Non-operating Income (Expense)
Non-operating income (expense) primarily includes interest expense, gains and
losses earned on investments, income from derivative instruments not associated
with our core business, as well as the non-service components of net periodic
pension income and expenses.
Results of Operations
Net Revenues
The following table sets forth our net revenues earned in the U.S. and
internationally:
                         For the Years Ended
                            September 30,                        $ Change                 % Change(1)
                                                             2020         2019           2020         2019
                                                             vs.           vs.           vs.          vs.
                   2020          2019          2018          2019         2018           2019         2018
                                             (in millions, except percentages)
U.S.            $ 10,125$ 10,279$  9,332$   (154)$   947             (1) %     10  %

International 11,721 12,698 11,277 (977) 1,421

             (8) %     13  %

Net revenues $ 21,846$ 22,977$ 20,609$ (1,131)$ 2,368

             (5) %     11  %


(1)Figures in the table may not recalculate exactly due to rounding. Percentage
changes are calculated based on unrounded numbers.
Net revenues decreased in fiscal 2020 primarily due to the year-over-year
changes in payments volume, cross-border volume and processed transactions,
which were impacted by COVID-19 starting in the latter part of March 2020.
Our net revenues are impacted by the overall strengthening or weakening of the
U.S. dollar as payments volume and related revenues denominated in local
currencies are converted to U.S. dollars. Exchange rate movements in fiscal
2020, as partially mitigated by our hedging program, negatively impacted our net
revenues growth by approximately half a percentage point.
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The following table sets forth the components of our net revenues:
                                                   For the Years Ended
                                                      September 30,                                  $ Change                             % Change(1)
                                                                                              2020              2019                2020                 2019
                                                                                               vs.              vs.                  vs.                  vs.
                                        2020              2019              2018              2019              2018                2019                 2018
                                                                                  (in millions, except percentages)
Service revenues                     $  9,804$  9,700$  8,918$    104$   782                       1  %              9  %
Data processing revenues               10,975            10,333             9,027               642            1,306                       6  %             14  %
International transaction revenues      6,299             7,804             7,211            (1,505)             593                     (19) %              8  %
Other revenues                          1,432             1,313               944               119              369                       9  %             39  %
Client incentives                      (6,664)           (6,173)           (5,491)             (491)            (682)                      8  %             12  %
Net revenues                         $ 21,846$ 22,977$ 20,609$ (1,131)$ 2,368                      (5) %             11  %


(1)Figures in the table may not recalculate exactly due to rounding. Percentage
changes are calculated based on unrounded numbers.
•Service revenues increased primarily due to 1% growth in nominal payments
volume.
•Data processing revenues increased due to 2% growth in processed transactions,
growth in value added services and select pricing modifications.
•International transaction revenues decreased due to a 23% decline in nominal
cross-border volumes, excluding transactions within Europe, as COVID-19 spread
globally starting in the latter part of March 2020. International transaction
revenues were also impacted by select pricing modifications.
•Other revenues increased primarily due to the increase in consulting and
marketing services related fees, other value added services and
acquisition-related revenues.
•Client incentives increased mainly due to incentives recognized on long-term
client contracts that were initiated or renewed during fiscal 2020 partially
offset by the recent decline in global payments volume. The amount of client
incentives we record in future periods will vary based on changes in performance
expectations, actual client performance, amendments to existing contracts or the
execution of new contracts.
Operating Expenses
The following table sets forth the components of our total operating expenses:
                                        For the Years Ended
                                           September 30,                    $ Change                % Change(1)
                                                                         2020       2019          2020         2019
                                                                         vs.         vs.          vs.           vs.
                                  2020         2019         2018         2019       2018          2019         2018
                                                          (in millions, except percentages)
Personnel                       $ 3,785$ 3,444$ 3,170$  341$ 274             10  %       9  %
Marketing                           971        1,105          988        (134)       117            (12) %      12  %
Network and processing              727          721          686           6         35              1  %       5  %
Professional fees                   408          454          446         (46)         8            (10) %       2  %

Depreciation and amortization 767 656 613 111 43

             17  %       7  %

General and administrative 1,096 1,196 1,145 (100) 51

             (8) %       4  %
Litigation provision                 11          400          607        (389)      (207)           (97) %     (34) %

Total operating expenses(2) $ 7,765$ 7,976$ 7,655$ (211)$ 321

             (3) %       4  %


(1)Figures in the table may not recalculate exactly due to rounding. Percentage
changes are calculated based on unrounded numbers.
(2)Operating expenses for fiscal 2019 and 2018 include significant items that we
do not believe are indicative of our operating performance as they are related
to the interchange multidistrict litigation provision or charitable donations.
See Overview within this Item 7-Management's Discussion and Analysis of
Financial Condition and Results of Operations.
•Personnel expenses increased due to continued headcount growth in support of
our investment strategy for future growth.
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•Marketing expenses decreased reflecting our overall cost reduction strategy,
the absence of FIFA women's world cup and the delay of the Tokyo Olympics to
fiscal 2021, partially offset by an increase in client marketing spend.
•Professional fees decreased reflecting our overall cost reduction strategy.
•Depreciation and amortization expenses increased primarily due to additional
depreciation and amortization from our on-going investments, including
acquisitions.
•General and administrative expenses decreased primarily due to travel
restrictions and our overall cost reduction strategy.
•Litigation provision decreased primarily due to lower accruals for uncovered
litigation in fiscal 2020 and a $370 million accrual in fiscal 2019 related to
the interchange multidistrict litigation. See Note 5-U.S. and Europe
Retrospective Responsibility Plans and Note 20-Legal Matters to our consolidated
financial statements included in Item 8-Financial Statements and Supplementary
Data of this report.
Non-operating Income (Expense)
The following table sets forth the components of our non-operating income
(expense):
                                                For the Years Ended
                                                   September 30,                              $ Change                            % Change(1)
                                                                                        2020            2019                2020                  2019
                                                                                         vs.             vs.                 vs.                  vs.
                                        2020            2019            2018            2019            2018                2019                  2018
                                                                               (in millions, except percentages)
Interest expense, net                $  (516)$ (533)$ (612)$   17$   79                      (3) %             (13) %
Investment income and other              225             416             464            (191)            (48)                    (46) %            

(10) % Total non-operating income (expense) $ (291)$ (117)$ (148)$ (174)$ 31

                     148  %             

(20) %

(1)Figures in the table may not recalculate exactly due to rounding. Percentage changes are calculated based on unrounded numbers.


•Interest expense, net decreased primarily as a result of derivative instruments
that lowered the cost of borrowing on a portion of our outstanding debt, offset
by additional interest expense related to the issuance of debt in fiscal 2020.
See Note 10-Debt and Note 13-Derivative Financial Instruments to our
consolidated financial statements included in Item 8-Financial Statements and
Supplementary Data of this report.

•Investment income and other decreased primarily due to lower gains on our
equity investments and lower interest income on our cash and investments. See
Note 6-Fair Value Measurements and Investments to our consolidated financial
statements included in Item 8-Financial Statements and Supplementary Data of
this report.
Effective Income Tax Rate
The following table sets forth our effective income tax rate:
                                      For the Years Ended
                                         September 30,                      Change
                                                                        2020       2019
                                                                         vs.       vs.
                                   2020             2019      2018      2019       2018
Effective income tax rate                 21  %     19  %     20  %       2  %     (1) %


The effective tax rate in fiscal 2020 differs from the effective tax rate in
fiscal 2019 mainly due to a $329 million non-recurring, non-cash tax expense
relating to the remeasurement of UK deferred tax liabilities, as a result of the
enactment of UK legislation on July 22, 2020 that repealed the previous tax rate
reduction from 19% to 17% that was effective on April 1, 2020. The remeasurement
of UK deferred tax liabilities was primarily related to deferred taxes on
intangibles recorded upon the acquisition of Visa Europe in fiscal 2016.
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Liquidity and Capital Resources
Management of Our Liquidity
We regularly evaluate cash requirements for current operations, commitments,
development activities and capital expenditures, and we may elect to raise
additional funds for these purposes in the future through the issuance of either
debt or equity. Our treasury policies provide management with the guidelines and
authority to manage liquidity risk in a manner consistent with our corporate
objectives.
The objectives of our treasury policies are to:
•provide adequate liquidity to cover operating expenditures and liquidity
contingency scenarios;
•ensure timely completion of payments settlement activities;
•ensure payments on required litigation settlements;
•make planned capital investments in our business;
•pay dividends and repurchase our shares at the discretion of our board of
directors; and
•invest excess cash in securities that enable us to first meet our working
capital and liquidity needs, and earn additional income.
Based on our current cash flow budgets and forecasts of our short-term and
long-term liquidity needs, we believe that our projected sources of liquidity
will be sufficient to meet our projected liquidity needs for more than the next
12 months. We will continue to assess our liquidity position and potential
sources of supplemental liquidity in view of our operating performance, current
economic and capital market conditions and other relevant circumstances.
Cash Flow Data
The following table summarizes our cash flow activity for the fiscal years
presented:
                                                                              For the Years Ended
                                                                                 September 30,
                                                                   2020              2019              2018
                                                                                 (in millions)
Total cash provided by (used in):
Operating activities                                            $ 10,440$ 12,784$ 12,941
Investing activities                                               1,427              (591)           (3,084)
Financing activities                                              (3,968)  

(12,061) (10,790) Effect of exchange rate changes on cash, cash equivalents, restricted cash and restricted cash equivalents

                      440              (277)             (101)

Increase (decrease) in cash, cash equivalents, restricted cash and restricted cash equivalents

                                 $  8,339

$ (145)$ (1,034)



Operating activities. Cash provided by operating activities in fiscal 2020 was
lower than the prior fiscal year primarily due to lower net income, higher
client incentive payments and timing of settlement.
Investing activities. Cash provided by investing activities in fiscal 2020 was
higher than the prior fiscal year primarily due to higher proceeds from sales
and maturities of investment securities, combined with fewer investment security
purchases, lower purchase consideration paid for acquisitions, net of cash and
restricted cash acquired, due to fewer acquisitions and lower purchases of other
investments.
Financing activities. Cash used in financing activities in fiscal 2020 was lower
than the prior fiscal year primarily due to proceeds received from the issuance
of senior notes, the absence of the deferred purchase consideration payment made
in the prior year and lower share repurchases, partially offset by higher
dividends paid. See Note 10-Debt and Note 15-Stockholders' Equity, to our
consolidated financial statements included in Item 8-Financial Statements and
Supplementary Data of this report.
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Sources of Liquidity
Our primary sources of liquidity are cash on hand, cash flow from our
operations, our investment portfolio and access to various equity and borrowing
arrangements. Funds from operations are maintained in cash and cash equivalents
and short-term or long-term available-for-sale investment securities based upon
our funding requirements, access to liquidity from these holdings and the return
that these holdings provide. We believe that cash flow generated from
operations, in conjunction with access to our other sources of liquidity, will
be more than sufficient to meet our ongoing operational needs.
Available-for-sale debt securities. Our investment portfolio is designed to
invest cash in securities which enables us to meet our working capital and
liquidity needs. Our investment portfolio consists of debt securities issued by
the U.S.Treasury or U.S. government-sponsored agencies. The majority of these
investments, $3.6 billion, are classified as current and are available to meet
short-term liquidity needs. The remaining non-current investments have stated
maturities of more than one year from the balance sheet date; however, they are
also generally available to meet short-term liquidity needs.
Factors that may impact the liquidity of our investment portfolio include, but
are not limited to, changes to credit ratings of the securities, uncertainty
related to regulatory developments, actions by central banks and other monetary
authorities and the ongoing strength and quality of credit markets. We will
continue to review our portfolio in light of evolving market and economic
conditions. However, if current market conditions deteriorate, the liquidity of
our investment portfolio may be impacted and we could determine that some of our
investments are impaired, which could adversely impact our financial results. We
have policies that limit the amount of credit exposure to any one financial
institution or type of investment.
Commercial paper program. We maintain a commercial paper program to support our
working capital requirements and for other general corporate purposes. Under the
program, we are authorized to issue up to $3.0 billion in outstanding notes,
with maturities up to 397 days from the date of issuance. We had no outstanding
obligations under the program at September 30, 2020. See Note 10-Debt to our
consolidated financial statements included in Item 8-Financial Statements and
Supplementary Data of this report.
Credit facility. We have an unsecured $5.0 billion revolving credit facility
(the "Credit Facility") which expires on July 25, 2024. There were no borrowings
under the Credit Facility as of September 30, 2020. See Note 10-Debt to our
consolidated financial statements included in Item 8-Financial Statements and
Supplementary Data of this report.
Senior notes. In fiscal 2020, we issued fixed-rate senior notes in public
offerings in an aggregate principal amount of $7.3 billion with maturities
between 7 and 30 years. See Note 10-Debt to our consolidated financial
statements included in Item 8-Financial Statements and Supplementary Data of
this report.
U.S. Litigation escrow account. Pursuant to the terms of the U.S. retrospective
responsibility plan, which was created to insulate Visa and our class A common
shareholders from financial liability for certain litigation cases, we maintain
a U.S. litigation escrow account from which monetary liabilities from
settlements of, or judgments in, the U.S. covered litigation will be payable.
When we fund the U.S. litigation escrow account, the shares of class B common
stock held by our stockholders are subject to dilution through an adjustment to
the conversion rate of the shares of class B common stock to shares of class A
common stock. The balance in this account at September 30, 2020, was $0.9
billion and is reflected as restricted cash equivalents in our consolidated
balance sheets. As these funds are restricted for the sole purpose of making
payments related to the U.S. covered litigation matters, as described below
under Uses of Liquidity, we do not rely on them for other operational needs. See
Note 5-U.S. and Europe Retrospective Responsibility Plans and Note 20-Legal
Matters to our consolidated financial statements included in Item 8-Financial
Statements and Supplementary Data of this report.
Credit Ratings
At September 30, 2020, our credit ratings by Standard and Poor's and Moody's
were as follows:
                                   Standard and Poor's                   Moody's
Debt type                     Rating                 Outlook      Rating         Outlook
Short-term unsecured debt      A-1+                  Stable        P-1           Stable
Long-term unsecured debt        AA-                  Stable        Aa3           Stable


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Various factors affect our credit ratings, including changes in our operating
performance, the economic environment, conditions in the electronic payment
industry, our financial position and changes in our business strategy. We do not
currently foresee any reasonable circumstances under which our credit ratings
would be significantly downgraded. If a downgrade were to occur, it could
adversely impact, among other things, our future borrowing costs and access to
capital markets.
Uses of Liquidity
Payments settlement. Payments settlement due to and from our financial
institution clients can represent a substantial daily liquidity requirement.
Most U.S. dollar settlements are settled within the same day and do not result
in a receivable or payable balance, while settlements in currencies other than
the U.S. dollar generally remain outstanding for one to two business days, which
is consistent with industry practice for such transactions. In general, during
fiscal 2020, we were not required to fund settlement-related working capital.
Our average daily net settlement position was a net payable of $452 million. We
hold approximately $7.7 billion of available liquidity globally as of
September 30, 2020, in the form of cash, cash equivalents and available-for-sale
investment securities, to fund daily settlement in the event one or more of our
financial institution clients are unable to settle.
U.S. covered litigation. We are parties to legal and regulatory proceedings with
respect to a variety of matters, including certain litigation that we refer to
as the U.S. covered litigation. As noted above, monetary liabilities from
settlements of, or judgments in, the U.S. covered litigation are payable from
the U.S. litigation escrow account. In September 2018, Visa and other defendants
entered into an Amended Settlement Agreement with plaintiffs in the interchange
multidistrict litigation purporting to represent a class of plaintiffs seeking
monetary damages, which superseded and amended the 2012 Settlement Agreement. In
December 2019, the district court granted final approval of the Amended
Settlement Agreement relating to claims by the Damages Class, which was
subsequently appealed. Settlement discussions with plaintiffs purporting to act
on behalf of the putative Injunctive Relief Class are ongoing.
During fiscal 2020, we have reached settlements with a number of merchants
representing approximately 40% of the Visa-branded payment card sales volume of
merchants who opted out of the Amended Settlement Agreement with the Damages
Class plaintiffs. At September 30, 2020, the U.S. litigation escrow account had
an available balance of $0.9 billion for settlement with opt-out merchants.
Other litigation. Judgments in and settlements of litigation, other than the
U.S. covered litigation, including VE territory covered litigation or other
fines imposed in investigations and proceedings, could give rise to future
liquidity needs.
Common stock repurchases. During fiscal 2020, we repurchased 44 million shares
of our class A common stock in the open market for $8.1 billion. As of
September 30, 2020, our January 2020 Program had remaining authorized funds of
$5.5 billion. See Note 15-Stockholders' Equity to our consolidated financial
statements included in Item 8-Financial Statements and Supplementary Data of
this report.
Dividends. During fiscal 2020, we declared and paid $2.7 billion in dividends at
a quarterly rate of $0.30 per share. On October 23, 2020, our board of directors
declared a quarterly cash dividend of $0.32 per share of class A common stock
(determined in the case of class B and C common stock and series A, UK&I and
Europe preferred stock on an as-converted basis). We expect to pay approximately
$703 million in connection with this dividend on December 1, 2020. See Note
15-Stockholders' Equity to our consolidated financial statements included in
Item 8-Financial Statements and Supplementary Data of this report. We expect to
continue paying quarterly dividends in cash, subject to approval by the board of
directors. All preferred and class B and C common stock will share ratably on an
as-converted basis in such future dividends.
Pension and other postretirement benefits. We sponsor various qualified and
non-qualified defined benefit pension and other postretirement benefit plans
that provide for retirement and medical benefits for substantially all employees
residing in the U.S. As a result of the acquisition of Visa Europe, we assumed
the obligations related to Visa Europe's defined benefit plan, primarily
consisting of the UK pension plans. Our policy with respect to our U.S.
qualified pension plan is to contribute annually in September of each year, an
amount not less than the minimum required under the Employee Retirement Income
Security Act. Our U.S. non-qualified pension and other postretirement benefit
plans are funded on a current basis. In relation to the Visa Europe UK pension
plans, our funding policy is to contribute in accordance with the appropriate
funding requirements agreed with the trustees of our UK pension plans.
Additional amounts may be agreed with the UK pension plan trustees. In fiscal
2020, we made contributions to our U.S. pension and other postretirement benefit
plans of $3 million and to our Visa Europe's UK pension plans of $22 million. In
fiscal 2021, given current projections and assumptions, we anticipate funding
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our U.S. pension and other postretirement benefit plans and Visa Europe's UK
defined benefit pension plans by approximately $2 million and $10 million,
respectively. The actual contribution amount will vary depending upon the funded
status of the pension plan, movements in the discount rate, performance of the
plan assets and related tax consequences. See Note 11-Pension and Other
Postretirement Benefits to our consolidated financial statements included in
Item 8-Financial Statements and Supplementary Data of this report.
Capital expenditures. Our capital expenditures decreased slightly during fiscal
2020. We expect to continue investing in technology assets and payments system
infrastructure to support our digital solutions and core business initiatives.
Senior notes. A principal payment of $3.0 billion is due on December 14, 2020 on
our fixed-rate senior notes issued in December 2015, for which we have
sufficient liquidity. See Note 10-Debt to our consolidated financial statements
included in Item 8-Financial Statements and Supplementary Data of this report.
Acquisitions. In fiscal 2020, we entered into a definitive agreement to acquire
Plaid Inc. for $5.3 billion. We will pay approximately $4.9 billion of cash and
$0.4 billion of retention equity and deferred equity consideration. On November
5, 2020, the U.S. Department of Justice filed a complaint in the U.S. District
Court for the Northern District of California seeking a permanent injunction to
prevent Visa from acquiring Plaid. See Note 2-Acquisitions and Note 20-Legal
Matters to our consolidated financial statements included in Item 8-Financial
Statements and Supplementary Data of this report.
Off-Balance Sheet Arrangements
Our off-balance sheet arrangements are primarily comprised of guarantees and
indemnifications. Visa has no off-balance sheet arrangements, other than
purchase order commitments, as discussed and reflected in our contractual
obligations table below.
Indemnifications
We indemnify our financial institution clients for settlement losses suffered
due to the failure of any other client to fund its settlement obligations in
accordance with our operating rules. The amount of the indemnification is
limited to the amount of unsettled Visa payment transactions at any point in
time. We maintain and regularly review global settlement risk policies and
procedures to manage settlement risk, which may require clients to post
collateral if certain credit standards are not met. See Note 1-Summary of
Significant Accounting Policies and Note 12-Settlement Guarantee Management to
our consolidated financial statements included in Item 8-Financial Statements
and Supplementary Data of this report.
In the ordinary course of business, we enter into contractual arrangements with
financial institutions and other clients and partners under which we may agree
to indemnify the client for certain types of losses incurred relating to the
services we provide or otherwise relating to our performance under the
applicable agreement.
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Contractual Obligations
Our contractual commitments will have an impact on our future liquidity. The
contractual obligations identified in the table below include both on- and
off-balance sheet transactions that represent a material, expected or
contractually committed future obligation as of September 30, 2020. We believe
that we will be able to fund these obligations through cash generated from our
operations and available credit facilities.
                                                Payments Due by Period
                           Less than         1-3          3-5        More than
                             1 Year         Years        Years        5 Years        Total
                                                     (in millions)
Debt(1)                   $    3,643$ 4,411$ 1,046$  23,754$ 32,854
Purchase obligations(2)        1,541          746          413            712         3,412
Leases(3)                        108          216          209            554         1,087

Transition tax(4)                 86          162          369            264           881
Dividends(5)                     703            -            -              -           703

Total(6),(7),(8)          $    6,081$ 5,535$ 2,037$  25,284$ 38,937


(1)Amounts presented include payments for both interest and principal. Also see
Note 10-Debt to our consolidated financial statements included in Item
8-Financial Statements and Supplementary Data of this report.
(2)Represents agreements to purchase goods and services that specify significant
terms, including: fixed or minimum quantities to be purchased, minimum or
variable price provisions, and the approximate timing of the transaction. For
obligations where the individual years of spend are not specified in the
contract, we have estimated the timing of when these amounts will be spent.
(3)Includes operating leases for premises and equipment, which range in original
lease terms from less than one year to twenty-six years.
(4)Amounts presented relate to the estimated transition tax, net of foreign tax
credit carryovers, on certain foreign earnings of non-U.S. subsidiaries. See
Note 19-Income Taxes to our consolidated financial statements included in Item
8-Financial Statements and Supplementary Data of this report.
(5)Includes expected dividend amount of $703 million as dividends were declared
on October 23, 2020 and will be paid on December 1, 2020 to all holders of
record of Visa's common and preferred stock as of November 13, 2020.
(6)We have liabilities for uncertain tax positions of $2.0 billion as of
September 30, 2020. At September 30, 2020, we had also accrued $233 million of
interest and $31 million of penalties associated with our uncertain tax
positions. We cannot determine the range of cash payments that will be made and
the timing of the cash settlements, if any, associated with our uncertain tax
positions. Therefore, no amounts related to these obligations have been included
in the table.
(7)We evaluate the need to make contributions to our pension plan after
considering the funded status of the pension plan, movements in the discount
rate, performance of the plan assets and related tax consequences. Expected
contributions to our pension plan have not been included in the table as such
amounts are dependent upon the considerations discussed above, and may result in
a wide range of amounts. See Note 11-Pension and Other Postretirement Benefits
to our consolidated financial statements included in Item 8-Financial Statements
and Supplementary Data of this report and the Liquidity and Capital Resources
section of this Management's Discussion and Analysis of Financial Condition and
Results of Operations.
(8)Future cash payments for long-term contracts with financial institution
clients and other business partners are not included in the table as the amounts
are unknowable due to the inherent unpredictability of payment and transaction
volume. These agreements, which range in terms from less than one to fifteen
years, can provide card issuance and/or conversion support, volume/growth
targets or marketing and program support based on specific performance
requirements. As of September 30, 2020, we have $4.4 billion of client
incentives liability recorded on the consolidated balance sheet related to these
arrangements.
Critical Accounting Estimates
Our consolidated financial statements are prepared in accordance with accounting
principles generally accepted in the United States of America which require us
to make judgments, assumptions and estimates that affect the amounts reported.
See Note 1-Summary of Significant Accounting Policies to our consolidated
financial statements included in Item 8-Financial Statements and Supplementary
Data of this report. We have established policies and control procedures which
seek to ensure that estimates and assumptions are appropriately governed and
applied consistently from period to period. However, actual results could differ
from our assumptions and estimates, and such differences could be material.
We believe that the following accounting estimates are the most critical to
fully understand and evaluate our reported financial results, as they require
our most subjective or complex management judgments, resulting from the need to
make estimates about the effect of matters that are inherently uncertain and
unpredictable.
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Revenue Recognition-Client Incentives
Critical estimates. We enter into long-term incentive agreements with financial
institution clients, merchants and other business partners for various programs
designed to increase revenue by growing payments volume, increasing Visa product
acceptance, winning merchant routing transactions over to our network and
driving innovation. These incentives are primarily accounted for as reductions
to net revenues; however, if a separate identifiable benefit at fair value can
be established, they are accounted for as operating expenses. Incentives are
recognized systematically and rationally based on management's estimate of each
client's performance. These estimates are regularly reviewed and adjusted as
appropriate based on changes in performance expectations, actual client
performance, amendments to existing contracts or the execution of new contracts.
Assumptions and judgment. Estimation of client incentives relies on forecasts of
payments and transaction volume, card issuance and card conversion. Performance
is estimated using client-reported information, transactional information
accumulated from our systems, historical information, market and economic
conditions and discussions with our clients, merchants and business partners.
Impact if actual results differ from assumptions. If actual performance is not
consistent with our estimates, client incentives may be materially different
than initially recorded. Increases in incentive payments are generally driven by
increased payments and transaction volume, which drive our net revenues. As a
result, in the event incentive payments exceed estimates, such payments are not
expected to have a material effect on our financial condition, results of
operations or cash flows. The cumulative impact of a revision in estimates is
recorded in the period such revisions become probable and estimable. For the
year ended September 30, 2020, client incentives represented 23% of gross
revenues.
Legal and Regulatory Matters
Critical estimates. We are currently involved in various legal proceedings, the
outcomes of which are not within our complete control or may not be known for
prolonged periods of time. Management is required to assess the probability of
loss and estimate the amount of such loss, if any, in preparing our consolidated
financial statements.
Assumptions and judgment. We evaluate the likelihood of a potential loss from
legal or regulatory proceedings to which we are a party. We record a liability
for such claims when a loss is deemed probable and the amount can be reasonably
estimated. Significant judgment may be required in the determination of both
probability and whether a potential loss is reasonably estimable. Our judgments
are subjective based on management's understanding of the litigation profile,
the specifics of each case, our history with similar proceedings, advice of
in-house and outside legal counsel to the extent appropriate and management's
best estimate of incurred loss. As additional information becomes available, we
reassess the potential loss related to pending claims and may revise our
estimates.
We have entered into loss sharing agreements that reduce our potential liability
under certain litigation. However, our U.S. retrospective responsibility plan
only addresses monetary liabilities from settlements of, or final judgments in,
the U.S. covered litigation. The plan's mechanisms include the use of the U.S.
litigation escrow account. The accrual related to the U.S. covered litigation
could be either higher or lower than the U.S. litigation escrow account balance.
Our Europe retrospective responsibility plan only covers Visa Europe territory
covered litigation (and resultant liabilities and losses) relating to the
covered period, subject to certain limitations, and does not cover any fines or
penalties incurred in the European Commission proceedings or any other matter.
See Note 5-U.S. and Europe Retrospective Responsibility Plans and Note 20-Legal
Matters to our consolidated financial statements included in Item 8-Financial
Statements and Supplementary Data.
Impact if actual results differ from assumptions. Due to the inherent
uncertainties of the legal and regulatory processes in the multiple
jurisdictions in which we operate, our judgments may be materially different
than the actual outcomes, which could have material adverse effects on our
business, financial conditions and results of operations. See Note 20-Legal
Matters to our consolidated financial statements included in Item 8-Financial
Statements and Supplementary Data.
Income Taxes
Critical estimates. In calculating our effective income tax rate, we make
judgments regarding certain tax positions, including the timing and amount of
deductions and allocations of income among various tax jurisdictions.
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Assumptions and judgment. We have various tax filing positions with regard to
the timing and amount of deductions and credits, the establishment of
liabilities for uncertain tax positions and the allocation of income among
various tax jurisdictions. We are also required to inventory, evaluate and
measure all uncertain tax positions taken or to be taken on tax returns and to
record liabilities for the amount of such positions that may not be sustained,
or may only be partially sustained, upon examination by the relevant taxing
authorities.
Impact if actual results differ from assumptions. Although we believe that our
estimates and judgments are reasonable, actual results may differ from these
estimates. Some or all of these judgments are subject to review by the taxing
authorities. If one or more of the taxing authorities were to successfully
challenge our right to realize some or all of the tax benefit we have recorded,
and we were unable to realize this benefit, it could have a material adverse
effect on our financial results and cash flows.
ITEM 7A.  Quantitative and Qualitative Disclosures about Market Risk
Market risk is the potential economic loss arising from adverse changes in
market factors. Our exposure to financial market risks results primarily from
fluctuations in foreign currency exchange rates, interest rates and equity
prices. Aggregate risk exposures are monitored on an ongoing basis.
Foreign Currency Exchange Rate Risk
We are exposed to risks from foreign currency exchange rate fluctuations that
are primarily related to changes in the functional currency value of revenues
generated from foreign currency-denominated transactions and changes in the
functional currency value of payments in foreign currencies. We manage these
risks by entering into foreign currency forward contracts that hedge exposures
of the variability in the functional currency equivalent of anticipated
non-functional currency denominated cash flows. Our foreign currency exchange
rate risk management program reduces, but does not entirely eliminate, the
impact of foreign currency exchange rate movements.
At September 30, 2020 and 2019, the aggregate notional amounts of our foreign
currency forward contracts outstanding in our exchange rate risk management
program, including contracts not designated for cash flow hedge accounting, were
$3.9 billion and $3.1 billion, respectively. The aggregate notional amount
outstanding at September 30, 2020 is fully consistent with our strategy and
treasury policy aimed at reducing foreign exchange risk below a predetermined
and approved threshold. However, actual results could materially differ from our
forecast. The effect of a hypothetical 10% strengthening or weakening in the
value of the functional currencies at September 30, 2020 is estimated to create
an additional fair value gain of approximately $210 million or loss of
approximately $260 million, respectively, on our outstanding foreign currency
forward contracts. The gain or loss from this hypothetical strengthening or
weakening would be largely offset by a corresponding gain or loss on our cash
flows from foreign currency-denominated revenues and payments. See Note
1-Summary of Significant Accounting Policies and Note 13-Derivative Financial
Instruments to our consolidated financial statements included in Item
8-Financial Statements and Supplementary Data of this report.
We are further exposed to foreign currency exchange rate risk related to
translation as the functional currency of Visa Europe is the euro. Translation
from the euro to the U.S. dollar is performed for balance sheet accounts using
exchange rates in effect at the balance sheet date and for revenue and expense
accounts using an average exchange rate for the period. Resulting translation
adjustments are reported as a component of accumulated other comprehensive
income (loss) on the consolidated balance sheets. A hypothetical 10% change in
the euro against the U.S. dollar compared to the exchange rate at September 30,
2020, would result in a foreign currency translation adjustment of $2.2 billion.
See Note 1-Summary of Significant Accounting Policies to our consolidated
financial statements included in Item 8-Financial Statements and Supplementary
Data of this report.
We are also subject to foreign currency exchange risk in daily settlement
activities. This risk arises from the timing of rate setting for settlement with
clients relative to the timing of market trades for balancing currency
positions. Risk in settlement activities is limited through daily operating
procedures, including the utilization of Visa settlement systems and our
interaction with foreign exchange trading counterparties.
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Interest Rate Risk
Our investment portfolio assets are held in both fixed-rate and adjustable-rate
securities. Investments in fixed-rate instruments carry a degree of interest
rate risk. The fair value of fixed-rate securities may be adversely impacted due
to a rise in interest rates. Additionally, a falling-rate environment creates
reinvestment risk because as securities mature, the proceeds are reinvested at a
lower rate, generating less interest income. Historically, we have been able to
hold investments until maturity. Neither our statements of operations or cash
flows have been, nor are they expected to be, materially impacted by a sudden
change in market interest rates.
The fair value of our fixed-rate investment securities at September 30, 2020 and
2019 were $4.0 billion and $1.8 billion, respectively. The fair value of our
adjustable-rate debt securities were $2.0 billion and $4.6 billion at
September 30, 2020 and 2019, respectively. A hypothetical 100 basis point
increase in interest rates would create an estimated decrease in fair value of
approximately $3.5 million on our investment securities at September 30, 2020. A
hypothetical 100 basis point decrease in interest rates would create an
estimated increase in fair value of approximately $7.2 million on our investment
securities at September 30, 2020.
In fiscal 2019, we entered into interest rate and cross-currency swap agreements
on a portion of our outstanding senior notes that allow us to manage our
interest rate exposure through a combination of fixed and floating rates and
reduce our overall cost of borrowing. Together these swap agreements effectively
convert a portion of our U.S. dollar denominated fixed-rate payments into euro
denominated floating-rate payments. By entering into interest rate swaps, we
have assumed risks associated with market interest rate fluctuations. A
hypothetical 100 basis point increase in interest rates would have resulted in
an increase of approximately $30 million in annual interest expense. See Note
13-Derivative Financial Instruments to our consolidated financial statements
included in Item 8-Financial Statements and Supplementary Data of this report.
Equity Investment Risk
As of September 30, 2020 and 2019, the carrying value of our non-marketable
equity securities was $1.0 billion and $0.7 billion, respectively. These
investments are subject to a wide variety of market-related risks that could
substantially reduce or increase the fair value of our holdings. A decline in
financial condition or operating results of these investments could result in a
loss of all or a substantial part of our carrying value in these companies. We
regularly review our non-marketable equity securities for possible impairment,
which generally involves an analysis of the facts and changes in circumstances
influencing the investment, expectations of the entity's cash flows and capital
needs, and the viability of its business model.
Pension Plan Risk
At September 30, 2020 and 2019, our U.S. defined benefit pension plan assets
were $1.1 billion and projected benefit obligations were $0.9 billion at each
year end. A material adverse decline in the value of pension plan assets and/or
in the discount rate for benefit obligations would result in a decrease in the
funded status of the pension plan, an increase in pension cost and an increase
in required funding. A hypothetical 10% decrease in the value of pension plan
assets and a 1% decrease in the discount rate as of September 30, 2020 would
result in an aggregate decrease of approximately $221 million in the funded
status and an increase of approximately $44 million in pension cost.
At September 30, 2020 and 2019, our non-U.S. defined benefit pension plan assets
were $0.5 billion at each year end and projected benefit obligations were $0.6
billion and $0.5 billion, respectively. A material adverse decline in the value
of pension plan assets and/or in the discount rate for benefit obligations would
result in a decrease in the funded status of the pension plan, an increase in
pension cost and an increase in required funding. A hypothetical 10% decrease in
the value of pension plan assets and a 1% decrease in the discount rate as of
September 30, 2020 would result in an aggregate decrease of approximately $194
million in the funded status and an increase of approximately $17 million in
pension cost.
We will continue to monitor the performance of pension plan assets and market
conditions as we evaluate the amount of our contribution to the pension plans
for fiscal 2021, if any, which would be made in September 2021.
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