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 by delivering relevant, cost-effective online advertising, cloud-based solutions that provide customers with platforms, collaboration tools and services, and sales of other products and services, such as apps and in-app purchases, digital content and subscriptions for digital content, and hardware.
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 allowance for credit losses, fair values of financial instruments (including non-marketable equity securities), 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.
As of December 31, 2020 the impact of COVID-19 continues to unfold and the extent of the impact will depend on a number of factors, including the duration and severity of the pandemic; the uneven impact to certain industries; advances in testing, treatment and prevention; and the macroeconomic impact of government measures to contain the spread of the virus and related government stimulus measures. As a result, certain of our estimates and assumptions, including the allowance for credit losses for accounts receivable, the credit worthiness of customers entering into revenue arrangements, the valuation of non-marketable equity securities, including our impairment assessment, and the fair values of our financial instruments require increased judgment and carry a higher degree of variability and volatility that could result in material changes to our estimates in future periods.
In January 2021, we completed an assessment of the useful lives of our servers and network equipment and determined we should adjust the estimated useful life of our servers from three years to four years and the estimated useful life of certain network equipment from three years to five years. This change in accounting estimate will be effective beginning fiscal year 2021.
Revenue Recognition
Revenues are recognized when control of the promised goods or services is transferred to our customers and the collectibility of an amount that we expect in exchange for those goods or services is probable. Sales and other similar taxes are excluded from revenues.
Advertising Revenues
We generate advertising revenues primarily by delivering advertising on Google Search & other properties, including Google.com, the Google Search app, Google Play, Gmail and Google Maps; YouTube, and Google Network Members’ properties.
Our customers generally purchase advertising inventory through Google Ads, Google Ad Manager and Google Marketing Platform, among others.
We offer advertising by delivering both performance and brand advertising. We recognize revenues for performance advertising when a user engages with the advertisement, such as a click, a view, or a purchase. For brand advertising, we recognize revenues when the ad is displayed or a user views the ad.
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.
Google Cloud Revenues
Google Cloud revenues consist primarily of fees received for Google Cloud Platform services (which includes infrastructure and data analytics platform products and other services) and Google Workspace (formerly G Suite) collaboration tools and other enterprise services. Our cloud services are generally provided on either a consumption or subscription basis. Revenues related to cloud services provided on a consumption basis are recognized when the customer utilizes the services, based on the quantity of services consumed. Revenues related to cloud services provided on a subscription basis are recognized ratably over the contract term as the customer receives and consumes the benefits of the cloud services.
Other Revenues
Google other revenues and Other Bets revenues consist primarily of revenues from:
•Google Play, which includes revenues from sale of apps and in-app purchases (which we recognize net of payout to developers) and digital content sold in the Google Play store;
•hardware, including Google Nest home products, Pixelbooks, Pixel phones and other devices;
•YouTube non-advertising services including, YouTube premium and YouTube TV subscriptions and other services; and
•other 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.
Customer Incentives and Credits
Certain customers 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. We believe that there will not be significant changes to our estimates of variable consideration.
Sales Commissions
We expense sales commissions when incurred when the amortization period is one year or less. We recognize an asset for certain sales commissions if we expect the period of benefit of these costs to exceed one year and amortize it over the period of expected benefit. These costs are recorded within sales and marketing expenses.
Cost of Revenues
Cost of revenues consists of TAC and other costs of revenues.
TAC represents the amounts paid to our distribution partners who make available our search access points and services and amounts paid to Google Network Members primarily for ads displayed on their properties. Our distribution partners include browser providers, mobile carriers, original equipment manufacturers, and software developers.
Other cost of revenues (which is the cost of revenues excluding TAC) includes the following:
•Content acquisition costs primarily related to payments to content providers from whom we license video and other content for distribution on YouTube advertising and subscription services and Google Play. We pay fees to these content providers based on revenues generated or a flat fee;
•Expenses associated with our data centers and other operations (including bandwidth, compensation expense (including SBC), depreciation, energy, and other equipment costs); and
•Inventory related costs for hardware we sell.
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.
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 and the tax withholding is recorded as a reduction to additional paid-in capital.
Additionally, stock-based compensation also includes other stock-based awards, such as performance stock units ("PSUs") and awards that may be settled in cash or the stock of certain Other Bets. PSUs and certain Other Bet awards are equity classified and expense is recognized over the requisite service period. Certain Other Bet awards are liability classified and remeasured at fair value through settlement. The fair value of Other Bet awards is based on the equity valuation of the respective Other Bet.
Advertising and Promotional Expenses
We expense advertising and promotional costs in the period in which they are incurred. For the years ended December 31, 2018, 2019 and 2020, advertising and promotional expenses totaled approximately $6.4 billion, $6.8 billion, and $5.4 billion, respectively.
Performance Fees
Performance fees refer to compensation arrangements with payouts based on realized investment returns. We recognize compensation expense based on the estimated payouts, which may result in expense recognized before investment returns are realized. Performance fees, which are primarily related to gains on equity securities, are recorded as a component of other income (expense), net.
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 markets 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.
No individual customer or groups of affiliated customers represented more than 10% of our revenues in 2018, 2019, or 2020. In 2018, 2019, and 2020, we generated approximately 46%, 46%, and 47% of our revenues, respectively, from customers based in the U.S.
We are subject to concentrations of credit risk principally from cash and cash equivalents, marketable securities, foreign exchange contracts, and accounts receivable. We manage our credit risk exposure through timely assessment of our counterparty creditworthiness, credit limits and use of collateral management.
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.
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 measured at fair value on a nonrecurring basis include non-marketable equity securities, which are adjusted to fair value when observable price changes are identified or when the non-marketable equity securities are impaired (referred to as the measurement alternative). 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 - 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 government bonds, corporate debt securities, mortgage-backed and asset-backed securities, time deposits, and money market funds.
We classify all marketable debt securities that 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 on our Consolidated Balance Sheets.
We determine the appropriate classification of our investments in marketable debt securities at the time of purchase and reevaluate such designation at each balance sheet date. We have classified and accounted for our marketable debt securities as available-for-sale. After consideration of our risk versus reward objectives, as well as our liquidity requirements, we may sell these debt 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 on 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 the changes in allowance for expected credit losses, which are recorded in other income (expense), net. For certain marketable debt securities we have elected the fair value option, for which changes in fair value are recorded in other income (expense), net. We determine any realized gains or losses on the sale of marketable debt securities on a specific identification method, and we record such gains and losses as a component of other income (expense), net.
Our investments in marketable equity securities are measured at fair value with the related gains and losses, realized and unrealized, recognized in other income (expense), net.
Accounts Receivable
Our payment terms for accounts receivable 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 customers, we require payment before the products or services are delivered to the customer.
We maintain an allowance for credit losses for accounts receivable, which is recorded as an offset to accounts receivable and changes in such are classified as general and administrative expense in the Consolidated Statements of Income. We assess collectibility by reviewing accounts receivable on a collective basis where similar characteristics exist and on an individual basis when we identify specific customers with known disputes or collectibility issues. In determining the amount of the allowance for credit losses, we consider historical collectibility based on past due status and make judgments about the creditworthiness of customers based on ongoing credit evaluations. We also consider customer-specific information, current market conditions and reasonable and supportable forecasts of future economic conditions to inform adjustments to historical loss data.
For the year ended December 31, 2020, our assessment considered the impact of COVID-19 and estimates of expected credit and collectibility trends. Volatility in market conditions and evolving credit trends are difficult to predict and may cause variability and volatility that may have a material impact on our allowance for credit losses in future periods. The allowance for credit losses on accounts receivable was $275 million and $789 million as of December 31, 2019 and 2020, respectively.
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.
Non-Marketable Investments
We account for non-marketable equity investments through which we exercise significant influence but do not have control over the investee under the equity method. Our non-marketable equity securities not accounted for under the equity method are primarily accounted for under the measurement alternative. Under the measurement alternative, the carrying value of our non-marketable equity investments is adjusted to fair value for observable transactions for identical or similar investments of the same issuer or impairment. Adjustments are determined primarily based on a market approach as of the transaction date and are recorded as a component of other income (expense), net.
Non-marketable debt investments are classified as available-for-sale securities.
Non-marketable investments that do not have stated contractual maturity dates are classified as non-current assets on the Consolidated Balance Sheets.
Impairment of Investments
We periodically review our debt and non-marketable equity investments for impairment.
For debt securities in an unrealized loss position, we determine whether a credit loss exists. The credit loss is estimated by considering available information relevant to the collectibility of the security and information about past events, current conditions, and reasonable and supportable forecasts. Any credit loss is recorded as a charge to other income (expense), net, not to exceed the amount of the unrealized loss. Unrealized losses other than the credit loss are recognized in accumulated other comprehensive income ("AOCI"). If we have an intent to sell, or if it is more likely than not that we will be required to sell a debt security in an unrealized loss position before recovery of its amortized cost basis, we will write down the security to its fair value and record the corresponding charge as a component of other income (expense), net.
For non-marketable equity securities we consider whether impairment indicators exist by evaluating the companies' financial and liquidity position, access to capital resources and the time since the last adjustment to fair value, among others. If the assessment indicates that the investment is impaired, we write down the investment to its fair value by recording the corresponding charge as a component of other income (expense), net. Fair value is estimated using the best information available, which may include cash flow projections or other available market data.
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 is considered a variable interest entity ("VIE"). We consolidate VIEs when we are the primary beneficiary. We are the primary beneficiary of a VIE when we have the power to direct activities that most significantly affect the economic performance of the VIE and have the obligation to absorb the majority of their losses or benefits. If we are not the primary beneficiary in a VIE, we account for the investment or other variable interests in a VIE in accordance with applicable GAAP.
Periodically, we assess whether any changes in our interest or relationship with the entity affect our determination of whether the entity is a VIE and, if so, whether we are the primary beneficiary.
Property and Equipment
Property and equipment includes the following categories: land and buildings, information technology assets, construction in progress, leasehold improvements, and furniture and fixtures. Land and buildings include land, offices, data centers and related building improvements. Information technology assets include servers and network 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, which we regularly evaluate. We depreciate buildings over periods of seven to 25 years. We depreciate information technology assets generally over periods of three to five years (specifically, three years for servers and three to five years for network equipment).
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.
Leases
We determine if an arrangement is a lease at inception. Our lease agreements generally contain lease and non-lease components. Payments under our lease arrangements are primarily fixed. Non-lease components primarily include payments for maintenance and utilities. We combine fixed payments for non-lease components with lease payments and account for them together as a single lease component which increases the amount of our lease assets and liabilities.
Certain lease agreements contain variable payments, which are expensed as incurred and not included in the lease assets and liabilities. These amounts include payments affected by the Consumer Price Index, payments contingent on wind or solar production for power purchase arrangements, and payments for maintenance and utilities.
Lease assets and liabilities are recognized at the present value of the future lease payments at the lease commencement date. The interest rate used to determine the present value of the future lease payments is our incremental borrowing rate, because the interest rate implicit in our leases is not readily determinable. Our incremental borrowing rate is estimated to approximate the interest rate on a collateralized basis with similar terms and payments, and in economic environments where the leased asset is located. Our lease terms include periods under options to extend or terminate the lease when it is reasonably certain that we will exercise that option. We generally use the base, non-cancelable, lease term when determining the lease assets and liabilities. Lease assets also include any prepaid lease payments and lease incentives.
Operating lease assets and liabilities are included on our Consolidated Balance Sheet beginning January 1, 2019. The current portion of our operating lease liabilities is included in accrued expenses and other current liabilities and the long term portion is included in operating lease liabilities. Finance lease assets are included in property and equipment, net. Finance lease liabilities are included in accrued expenses and other current liabilities or long-term debt.
Operating lease expense (excluding variable lease costs) is recognized on a straight-line basis over the lease term.
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 or asset group are not recoverable, the impairment recognized is measured as the amount by which the carrying value exceeds its fair value. Impairments were not material for the periods presented.
We allocate goodwill to reporting units based on the expected benefit from the business combination. We evaluate our reporting units periodically, as well as when changes in our operating segments occur. For changes in reporting units, we 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. Goodwill impairments were not material for the periods presented.
Intangible assets with definite lives are amortized over their estimated useful lives. We amortize intangible assets on a straight-line basis with definite lives generally 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.
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 the 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 identifiable assets and liabilities is recorded as goodwill. Acquisition-related expenses are recognized separately from the business combination and are expensed as incurred.
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 (AOCI) 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 gain (loss) in other income (expense), net.
Recently Adopted Accounting Pronouncements
In June 2016, the Financial Accounting Standards Board ("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 model which requires the use of forward-looking information to calculate credit loss estimates. It also eliminates the concept of other-than-temporary impairment and requires credit losses related to certain available-for-sale debt securities to be recorded through an allowance for credit losses rather than as a reduction in the amortized cost basis of the securities. These changes result in earlier recognition of credit losses. We adopted ASU 2016-13 using the modified retrospective approach as of January 1, 2020. The cumulative effect upon adoption was not material to our consolidated financial statements. See “Impairment of Investments” and "Accounts Receivable" above as well as Note 3 for the effect on our consolidated financial statements.
Prior Period Reclassifications
Certain amounts in prior periods have been reclassified to conform with current period presentation. See Note 15 for further details.
Note 2. Revenues
Revenue Recognition
The following table presents our revenues disaggregated by type (in millions).
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Year Ended December 31,
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2018
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2019
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2020
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Google Search & other
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$
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85,296
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$
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98,115
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$
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104,062
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YouTube ads
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11,155
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15,149
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19,772
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Google Network Members' properties
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20,010
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21,547
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23,090
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Google advertising
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116,461
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134,811
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146,924
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Google other
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14,063
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17,014
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21,711
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Google Services total
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130,524
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151,825
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168,635
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Google Cloud
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5,838
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8,918
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13,059
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Other Bets
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595
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659
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657
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Hedging gains (losses)
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(138)
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455
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176
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Total revenues
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$
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136,819
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$
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161,857
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$
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182,527
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The following table presents our revenues disaggregated by geography, based on the addresses of our customers (in millions):
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Year Ended December 31,
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2018
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2019
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2020
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United States
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$
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63,269
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46
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%
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$
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74,843
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46
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%
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$
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85,014
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47
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%
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EMEA(1)
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44,739
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33
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50,645
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31
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55,370
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30
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APAC(1)
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21,341
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15
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26,928
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17
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32,550
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18
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Other Americas(1)
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7,608
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6
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8,986
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6
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9,417
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5
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Hedging gains (losses)
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(138)
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0
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455
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0
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176
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0
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Total revenues
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$
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136,819
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100
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%
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$
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161,857
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100
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%
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$
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182,527
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100
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%
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(1) Regions represent Europe, the Middle East, and Africa ("EMEA"); Asia-Pacific ("APAC"); and Canada and Latin America ("Other Americas").
Deferred Revenues and Remaining Performance Obligations
We record deferred revenues when cash payments are received or due in advance of our performance, including amounts which are refundable. Deferred revenues primarily relate to Google Cloud and Google other. Our total deferred revenue as of December 31, 2019 was $2.3 billion, of which $1.8 billion was recognized as revenues for the year ending December 31, 2020.
Additionally, we have performance obligations associated with commitments in customer contracts, primarily related to Google Cloud, for future services that have not yet been recognized as revenues, also referred to as remaining performance obligations. Remaining performance obligations include related deferred revenue currently recorded as well as amounts that will be invoiced in future periods, and excludes (i) contracts with an original expected term of one year or less, (ii) cancellable contracts, and (iii) contracts for which we recognize revenue at the amount to which we have the right to invoice for services performed. As of December 31, 2020, the amount not yet recognized as revenues from these commitments is $29.8 billion. We expect to recognize approximately half over the next 24 months with the remaining thereafter. However, the amount and timing of revenue recognition is largely driven by when the customer utilizes the services and our ability to deliver in accordance with relevant contract terms, which could impact our estimate of the remaining performance obligations and when we expect to recognize such as revenues.
Note 3. Financial Instruments
Debt Securities
We classify our marketable debt securities, which are accounted for as available-for-sale, within Level 2 in the fair value hierarchy because we use quoted market prices to the extent available or alternative pricing sources and models utilizing market observable inputs to determine fair value.
For certain marketable debt securities, we have elected the fair value option for which changes in fair value are recorded in other income (expense), net. The fair value option was elected for these securities to align with the unrealized gains and losses from related derivative contracts. Unrealized net gains related to debt securities still held where we have elected the fair value option were $87 million as of December 31, 2020. As of December 31, 2020, the fair value of these debt securities was $2 billion. Balances as of December 31, 2019 were not material.
The following tables summarize our debt securities, for which we did not elect the fair value option, by significant investment categories as of December 31, 2019 and 2020 (in millions):
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As of December 31, 2019
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Adjusted
Cost
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Gross
Unrealized
Gains
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Gross
Unrealized
Losses
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Fair
Value
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Cash and
Cash
Equivalents
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Marketable
Securities
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Level 2:
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Time deposits(1)
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$
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2,294
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$
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0
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|
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$
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0
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|
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$
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2,294
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$
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2,294
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$
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0
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Government bonds
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55,033
|
|
|
434
|
|
|
(30)
|
|
|
55,437
|
|
|
4,518
|
|
|
50,919
|
|
Corporate debt securities
|
27,164
|
|
|
337
|
|
|
(3)
|
|
|
27,498
|
|
|
44
|
|
|
27,454
|
|
Mortgage-backed and asset-backed securities
|
19,453
|
|
|
96
|
|
|
(41)
|
|
|
19,508
|
|
|
0
|
|
|
19,508
|
|
Total
|
$
|
103,944
|
|
|
$
|
867
|
|
|
$
|
(74)
|
|
|
$
|
104,737
|
|
|
$
|
6,856
|
|
|
$
|
97,881
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2020
|
|
Adjusted
Cost
|
|
Gross
Unrealized
Gains
|
|
Gross
Unrealized
Losses
|
|
Fair
Value
|
|
Cash and
Cash
Equivalents
|
|
Marketable
Securities
|
Level 2:
|
|
|
|
|
|
|
|
|
|
|
|
Time deposits(1)
|
$
|
3,564
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
3,564
|
|
|
$
|
3,564
|
|
|
$
|
0
|
|
Government bonds
|
55,156
|
|
|
793
|
|
|
(9)
|
|
|
55,940
|
|
|
2,527
|
|
|
53,413
|
|
Corporate debt securities
|
31,521
|
|
|
704
|
|
|
(2)
|
|
|
32,223
|
|
|
8
|
|
|
32,215
|
|
Mortgage-backed and asset-backed securities
|
16,767
|
|
|
364
|
|
|
(7)
|
|
|
17,124
|
|
|
0
|
|
|
17,124
|
|
Total
|
$
|
107,008
|
|
|
$
|
1,861
|
|
|
$
|
(18)
|
|
|
$
|
108,851
|
|
|
$
|
6,099
|
|
|
$
|
102,752
|
|
(1)The majority of our time deposits are domestic deposits.
We determine realized gains or losses on the sale or extinguishment of debt securities on a specific identification method. We recognized gross realized gains of $1.3 billion, $292 million, and $899 million for the years ended December 31, 2018, 2019, and 2020, respectively. We recognized gross realized losses of $143 million, $143 million, and $184 million for the years ended December 31, 2018, 2019, and 2020, respectively. We reflect these gains and losses as a component of other income (expense), net.
The following table summarizes the estimated fair value of our investments in marketable debt securities by stated contractual maturity dates (in millions):
|
|
|
|
|
|
|
As of
December 31, 2020
|
Due in 1 year or less
|
$
|
19,795
|
|
Due in 1 year through 5 years
|
69,228
|
|
Due in 5 years through 10 years
|
2,739
|
|
Due after 10 years
|
13,038
|
|
Total
|
$
|
104,800
|
|
The following tables present fair values and gross unrealized losses recorded to AOCI as of December 31, 2019 and 2020, 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, 2019
|
|
Less than 12 Months
|
|
12 Months or Greater
|
|
Total
|
|
Fair Value
|
|
Unrealized
Loss
|
|
Fair Value
|
|
Unrealized
Loss
|
|
Fair Value
|
|
Unrealized
Loss
|
Government bonds
|
$
|
6,752
|
|
|
$
|
(20)
|
|
|
$
|
4,590
|
|
|
$
|
(10)
|
|
|
$
|
11,342
|
|
|
$
|
(30)
|
|
Corporate debt securities
|
1,665
|
|
|
(2)
|
|
|
978
|
|
|
(1)
|
|
|
2,643
|
|
|
(3)
|
|
Mortgage-backed and asset-backed securities
|
4,536
|
|
|
(13)
|
|
|
2,835
|
|
|
(28)
|
|
|
7,371
|
|
|
(41)
|
|
Total
|
$
|
12,953
|
|
|
$
|
(35)
|
|
|
$
|
8,403
|
|
|
$
|
(39)
|
|
|
$
|
21,356
|
|
|
$
|
(74)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2020
|
|
Less than 12 Months
|
|
12 Months or Greater
|
|
Total
|
|
Fair Value
|
|
Unrealized
Loss
|
|
Fair Value
|
|
Unrealized
Loss
|
|
Fair Value
|
|
Unrealized
Loss
|
Government bonds
|
$
|
5,516
|
|
|
$
|
(9)
|
|
|
$
|
3
|
|
|
$
|
0
|
|
|
$
|
5,519
|
|
|
$
|
(9)
|
|
Corporate debt securities
|
1,999
|
|
|
(1)
|
|
|
0
|
|
|
0
|
|
|
1,999
|
|
|
(1)
|
|
Mortgage-backed and asset-backed securities
|
929
|
|
|
(5)
|
|
|
242
|
|
|
(2)
|
|
|
1,171
|
|
|
(7)
|
|
Total
|
$
|
8,444
|
|
|
$
|
(15)
|
|
|
$
|
245
|
|
|
$
|
(2)
|
|
|
$
|
8,689
|
|
|
$
|
(17)
|
|
During the years ended December 31, 2018, and 2019 we did not recognize any significant other-than-temporary impairment losses. During the year ended December 31, 2020, with the adoption of ASU 2016-13, we did not recognize significant credit losses and the ending allowance for credit losses was immaterial. See Note 7 for further details on other income (expense), net.
Equity Investments
The following discusses our marketable equity securities, non-marketable equity securities, gains and losses on marketable and non-marketable equity securities, as well as our equity securities accounted for under the equity method.
Our marketable equity securities are publicly traded stocks or funds measured at fair value and classified within Level 1 and 2 in the fair value hierarchy because we use quoted prices for identical assets in active markets or inputs that are based upon quoted prices for similar instruments in active markets.
Our non-marketable equity securities are investments in privately held companies without readily determinable market values. The carrying value of our non-marketable equity securities is adjusted to fair value for observable transactions for identical or similar investments of the same issuer or impairment (referred to as the measurement alternative). Non-marketable equity securities that have been remeasured during the period based on observable transactions are classified within Level 2 or Level 3 in the fair value hierarchy because we estimate the value based on valuation methods which may include a combination of the observable transaction price at the transaction date and other unobservable inputs including volatility, rights, and obligations of the securities we hold. The fair value of non-marketable equity securities that have been remeasured due to impairment are classified within Level 3.
Gains and losses on marketable and non-marketable equity securities
Gains and losses reflected in other income (expense), net, for our marketable and non-marketable equity securities are summarized below (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2019
|
|
2020
|
Net gain (loss) on equity securities sold during the period
|
$
|
(301)
|
|
|
$
|
1,339
|
|
Net unrealized gain (loss) on equity securities held as of the end of the period
|
2,950
|
|
|
4,253
|
|
Total gain (loss) recognized in other income (expense), net
|
$
|
2,649
|
|
|
$
|
5,592
|
|
In the table above, net gain (loss) on equity securities sold during the period reflects the difference between the sale proceeds and the carrying value of the equity securities at the beginning of the period or the purchase date, if later.
Cumulative net gains (losses) on equity securities sold during the period, which is summarized in the following table (in millions), represents the total net gains (losses) recognized after the initial purchase date of the equity security. While these net gains may have been reflected in periods prior to the period of sale, we believe they are important supplemental information as they reflect the economic realized net gains on the securities sold during the period. Cumulative net gains are calculated as the difference between the sale price and the initial purchase price for the equity security sold during the period.
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity Securities Sold During the Year Ended December 31,
|
|
2019
|
|
2020
|
Total sale price
|
$
|
3,134
|
|
|
$
|
4,767
|
|
Total initial cost
|
858
|
|
|
2,674
|
|
Cumulative net gains (losses)
|
$
|
2,276
|
|
|
$
|
2,093
|
|
Carrying value of marketable and non-marketable equity securities
The carrying value is measured as the total initial cost plus the cumulative net gain (loss). The carrying values for our marketable and non-marketable equity securities are summarized below (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2019
|
|
Marketable Equity Securities
|
|
Non-Marketable Equity Securities
|
|
Total
|
Total initial cost
|
$
|
1,935
|
|
|
$
|
8,297
|
|
|
$
|
10,232
|
|
Cumulative net gain (loss)(1)
|
1,361
|
|
|
3,056
|
|
|
4,417
|
|
Carrying value
|
$
|
3,296
|
|
|
$
|
11,353
|
|
|
$
|
14,649
|
|
(1)Non-marketable equity securities cumulative net gain (loss) is comprised of $3.5 billion unrealized gains and $445 million unrealized losses (including impairment).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2020
|
|
Marketable Equity Securities
|
|
Non-Marketable Equity Securities
|
|
Total
|
Total initial cost
|
$
|
2,227
|
|
|
$
|
14,616
|
|
|
$
|
16,843
|
|
Cumulative net gain (loss)(1)
|
3,631
|
|
|
4,277
|
|
|
7,908
|
|
Carrying value(2)
|
$
|
5,858
|
|
|
$
|
18,893
|
|
|
$
|
24,751
|
|
(1)Non-marketable equity securities cumulative net gain (loss) is comprised of $6.1 billion unrealized gains and $1.9 billion unrealized losses (including impairment).
(2)The long-term portion of marketable equity securities of $429 million is included in other non-current assets.
Marketable equity securities
The following table summarizes marketable equity securities measured at fair value by significant investment categories as of December 31, 2019 and 2020 (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2019
|
|
As of December 31, 2020
|
|
|
Cash and Cash Equivalents
|
|
Marketable Equity
Securities
|
|
Cash and Cash Equivalents
|
|
Marketable Equity
Securities
|
Level 1:
|
|
|
|
|
|
|
|
|
Money market funds
|
|
$
|
4,604
|
|
|
$
|
0
|
|
|
$
|
12,210
|
|
|
$
|
0
|
|
Marketable equity securities(1)(2)
|
|
0
|
|
|
3,046
|
|
|
0
|
|
|
5,470
|
|
|
|
4,604
|
|
|
3,046
|
|
|
12,210
|
|
|
5,470
|
|
Level 2:
|
|
|
|
|
|
|
|
|
Mutual funds
|
|
0
|
|
|
250
|
|
|
0
|
|
|
388
|
|
Total
|
|
$
|
4,604
|
|
|
$
|
3,296
|
|
|
$
|
12,210
|
|
|
$
|
5,858
|
|
(1) The balance as of December 31, 2019 and 2020 includes investments that were reclassified from non-marketable equity securities following the commencement of public market trading of the issuers or acquisition by public entities. As of December 31, 2020 certain investments are subject to short-term lock-up restrictions.
(2) As of December 31, 2020 the long-term portion of marketable equity securities of $429 million is included within other non-current assets.
Non-marketable equity securities
The following is a summary of unrealized gains and losses recorded in other income (expense), net, and included as adjustments to the carrying value of non-marketable equity securities (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2019
|
|
2020
|
|
|
Unrealized gains
|
$
|
2,163
|
|
|
$
|
3,020
|
|
|
|
Unrealized losses (including impairment)
|
(372)
|
|
|
(1,489)
|
|
|
|
Total unrealized gain (loss) for non-marketable equity securities
|
$
|
1,791
|
|
|
$
|
1,531
|
|
|
|
During the year ended December 31, 2020, included in the $18.9 billion of non-marketable equity securities, $9.7 billion were measured at fair value resulting in a net unrealized gain of $1.5 billion.
Equity securities accounted for under the Equity Method
As of December 31, 2019 and 2020, equity securities accounted for under the equity method had a carrying value of approximately $1.3 billion and $1.4 billion, respectively. Our share of gains and losses including impairment are included 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 enter into derivative instruments to manage risks relating to our ongoing business operations. The primary risk managed with derivative instruments is foreign exchange risk. We use foreign currency contracts to reduce the risk that our cash flows, earnings, and investment in foreign subsidiaries will be adversely affected by foreign currency exchange rate fluctuations. We also enter into derivative instruments to partially offset our exposure to other risks and enhance investment returns.
We recognize derivative instruments as either assets or liabilities in the Consolidated Balance Sheets at fair value and classify the derivatives primarily within Level 2 in the fair value hierarchy. We present our collar contracts (an option strategy comprised of a combination of purchased and written options) at net fair values where both the purchased and written options are with the same counterparty. For other derivative contracts, we present at gross fair values. We primarily record changes in the fair value in the Consolidated Statements of Income as either other income (expense), net, or revenues, or in the Consolidated Balance Sheets in AOCI, as discussed below.
We enter into master netting arrangements, which reduce credit risk by permitting net settlement of transactions with the same counterparty. Further, we enter into collateral security arrangements that provide for collateral to be received or pledged when the net fair value of certain financial instruments fluctuates from contractually established thresholds. Cash collateral received related to derivative instruments under our collateral security arrangements are included in other current assets with a corresponding liability. Cash and non-cash
collateral pledged related to derivative instruments under our collateral security arrangements are included in other current assets.
Cash Flow Hedges
We designate foreign currency forward and option contracts (including collars) as cash flow hedges to hedge certain forecasted revenue transactions denominated in currencies other than the U.S. dollar. These contracts have maturities of 24 months or less.
Cash flow hedge amounts included in the assessment of hedge effectiveness are deferred in AOCI and subsequently reclassified to revenue when the hedged item is recognized in earnings. We exclude the change in forward points and time value from our assessment of hedge effectiveness. The initial value of the excluded component is amortized on a straight-line basis over the life of the hedging instrument and recognized in revenues. The difference between fair value changes of the excluded component and the amount amortized to revenues is recorded in AOCI. If the hedged transactions become probable of not occurring, the corresponding amounts in AOCI are reclassified to other income (expense), net in the period of de-designation.
As of December 31, 2020, the net accumulated loss on our foreign currency cash flow hedges before tax effect was $124 million, which is expected to be reclassified from AOCI into earnings within the next 12 months.
Fair Value Hedges
We designate foreign currency forward contracts as fair value hedges to hedge foreign currency risks for our investments denominated in currencies other than the U.S. dollar. Fair value hedge amounts included in the assessment of hedge effectiveness are recognized in other income (expense), net, along with the offsetting gains and losses of the related hedged items. We exclude changes in forward points from the assessment of hedge effectiveness and recognize changes in the excluded component in other income (expense), net.
Net Investment Hedges
We designate foreign currency forward contracts as net investment hedges to hedge the foreign currency risks related to our investment in foreign subsidiaries. Net investment hedge amounts included in the assessment of hedge effectiveness are recognized in AOCI along with the foreign currency translation adjustment. We exclude changes in forward points from the assessment of hedge effectiveness and recognize changes in the excluded component in other income (expense), net.
Other Derivatives
Other derivatives not designated as hedging instruments consist primarily of foreign currency forward contracts that we use to hedge intercompany transactions and other monetary assets or liabilities denominated in currencies other than the functional currency of a subsidiary. Gains and losses on these contracts, as well as the related costs, are recognized in other income (expense), net, along with the foreign currency gains and losses on monetary assets and liabilities.
We also use derivatives not designated as hedging instruments to manage risks relating to interest rates, equity and commodity prices, credit exposures and to enhance investment returns.
The gross notional amounts of our outstanding derivative instruments were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2019
|
|
As of December 31, 2020
|
|
|
|
|
Derivatives Designated as Hedging Instruments:
|
|
|
Foreign exchange contracts
|
|
|
|
Cash flow hedges
|
$
|
13,207
|
|
|
$
|
10,187
|
|
Fair value hedges
|
$
|
455
|
|
|
$
|
1,569
|
|
Net investment hedges
|
$
|
9,318
|
|
|
$
|
9,965
|
|
Derivatives Not Designated as Hedging Instruments:
|
|
|
Foreign exchange contracts
|
$
|
43,497
|
|
|
$
|
39,861
|
|
Other contracts
|
$
|
117
|
|
|
$
|
2,399
|
|
The fair values of our outstanding derivative instruments were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2019
|
|
|
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
|
|
$
|
91
|
|
|
$
|
253
|
|
|
$
|
344
|
|
Other contracts
|
|
Other current and non-current assets
|
|
0
|
|
|
1
|
|
|
1
|
|
Total
|
|
|
|
$
|
91
|
|
|
$
|
254
|
|
|
$
|
345
|
|
Derivative Liabilities:
|
|
|
|
|
|
|
|
|
Level 2:
|
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
|
Accrued expenses and other liabilities, current and non-current
|
|
$
|
173
|
|
|
$
|
196
|
|
|
$
|
369
|
|
Other contracts
|
|
Accrued expenses and other liabilities, current and non-current
|
|
0
|
|
|
13
|
|
|
13
|
|
Total
|
|
|
|
$
|
173
|
|
|
$
|
209
|
|
|
$
|
382
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2020
|
|
|
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
|
|
$
|
33
|
|
|
$
|
316
|
|
|
$
|
349
|
|
Other contracts
|
|
Other current and non-current assets
|
|
0
|
|
|
16
|
|
|
16
|
|
Total
|
|
|
|
$
|
33
|
|
|
$
|
332
|
|
|
$
|
365
|
|
Derivative Liabilities:
|
|
|
|
|
|
|
|
|
Level 2:
|
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
|
Accrued expenses and other liabilities, current and non-current
|
|
$
|
395
|
|
|
$
|
185
|
|
|
$
|
580
|
|
Other contracts
|
|
Accrued expenses and other liabilities, current and non-current
|
|
0
|
|
|
942
|
|
|
942
|
|
Total
|
|
|
|
$
|
395
|
|
|
$
|
1,127
|
|
|
$
|
1,522
|
|
The gains (losses) on derivatives in cash flow hedging and net investment hedging relationships recognized in other comprehensive income ("OCI") are summarized below (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gains (Losses) Recognized in OCI
on Derivatives Before Tax Effect
|
|
|
Year Ended December 31,
|
|
|
2018
|
|
2019
|
|
2020
|
Derivatives in Cash Flow Hedging Relationship:
|
|
|
|
|
|
|
Foreign exchange contracts
|
|
|
|
|
|
|
Amount included in the assessment of effectiveness
|
|
$
|
332
|
|
|
$
|
38
|
|
|
$
|
102
|
|
Amount excluded from the assessment of effectiveness
|
|
26
|
|
|
(14)
|
|
|
(37)
|
|
Derivatives in Net Investment Hedging Relationship:
|
|
|
|
|
|
|
Foreign exchange contracts
|
|
|
|
|
|
|
Amount included in the assessment of effectiveness
|
|
136
|
|
|
131
|
|
|
(851)
|
|
Total
|
|
$
|
494
|
|
|
$
|
155
|
|
|
$
|
(786)
|
|
The effect of derivative instruments on income is summarized below (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gains (Losses) Recognized in Income
|
|
Year Ended December 31,
|
|
2018
|
|
2019
|
|
2020
|
|
Revenues
|
|
Other income (expense), net
|
|
Revenues
|
|
Other income (expense), net
|
|
Revenues
|
|
Other income (expense), net
|
Total amounts presented in the Consolidated Statements of Income in which the effects of cash flow and fair value hedges are recorded
|
$
|
136,819
|
|
|
$
|
7,389
|
|
|
$
|
161,857
|
|
|
$
|
5,394
|
|
|
$
|
182,527
|
|
|
$
|
6,858
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gains (Losses) on Derivatives in Cash Flow Hedging Relationship:
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
|
|
|
|
|
|
|
|
|
|
|
Amount of gains (losses) reclassified from AOCI to income
|
$
|
(139)
|
|
|
$
|
0
|
|
|
$
|
367
|
|
|
$
|
0
|
|
|
$
|
144
|
|
|
$
|
0
|
|
Amount excluded from the assessment of effectiveness recognized in earnings based on an amortization approach
|
1
|
|
|
0
|
|
|
88
|
|
|
0
|
|
|
33
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gains (Losses) on Derivatives in Fair Value Hedging Relationship:
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
|
|
|
|
|
|
|
|
|
|
|
Hedged items
|
0
|
|
|
(96)
|
|
|
0
|
|
|
(19)
|
|
|
0
|
|
|
18
|
|
Derivatives designated as hedging instruments
|
0
|
|
|
96
|
|
|
0
|
|
|
19
|
|
|
0
|
|
|
(18)
|
|
Amount excluded from the assessment of effectiveness
|
0
|
|
|
37
|
|
|
0
|
|
|
25
|
|
|
0
|
|
|
4
|
|
Gains (Losses) on Derivatives in Net Investment Hedging Relationship:
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
|
|
|
|
|
|
|
|
|
|
|
Amount excluded from the assessment of effectiveness
|
0
|
|
|
78
|
|
|
0
|
|
|
243
|
|
|
0
|
|
|
151
|
|
Gains (Losses) on Derivatives Not Designated as Hedging Instruments:
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
0
|
|
|
54
|
|
|
0
|
|
(413)
|
|
|
0
|
|
|
718
|
|
Other Contracts
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
(906)
|
|
Total gains (losses)
|
$
|
(138)
|
|
|
$
|
169
|
|
|
$
|
455
|
|
|
$
|
(145)
|
|
|
$
|
177
|
|
|
$
|
(33)
|
|
Offsetting of Derivatives
The gross amounts of our derivative instruments subject to master netting arrangements with various counterparties, and cash and non-cash collateral received and pledged under such agreements were as follows (in millions):
Offsetting of Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2019
|
|
|
|
|
|
|
|
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
|
$
|
366
|
|
|
$
|
(21)
|
|
|
$
|
345
|
|
|
$
|
(88)
|
|
(1)
|
$
|
(234)
|
|
|
$
|
0
|
|
|
$
|
23
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2020
|
|
|
|
|
|
|
|
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
|
$
|
397
|
|
|
$
|
(32)
|
|
|
$
|
365
|
|
|
$
|
(295)
|
|
(1)
|
$
|
(16)
|
|
|
$
|
0
|
|
|
$
|
54
|
|
(1) The balances as of December 31, 2019 and 2020 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, 2019
|
|
|
|
|
|
|
|
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
|
$
|
403
|
|
|
$
|
(21)
|
|
|
$
|
382
|
|
|
$
|
(88)
|
|
(2)
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
294
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2020
|
|
|
|
|
|
|
|
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
|
$
|
1,554
|
|
|
$
|
(32)
|
|
|
$
|
1,522
|
|
|
$
|
(295)
|
|
(2)
|
$
|
(1)
|
|
|
$
|
(943)
|
|
|
$
|
283
|
|
(2) The balances as of December 31, 2019 and 2020 were related to derivative assets which are allowed to be net settled against derivative liabilities in accordance with our master netting agreements.
Note 4. Leases
We have entered into operating and finance lease agreements primarily for data centers, land and offices throughout the world with lease periods expiring between 2021 and 2063.
Components of operating lease expense were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2019
|
|
2020
|
Operating lease cost
|
$
|
1,820
|
|
|
$
|
2,267
|
|
Variable lease cost
|
541
|
|
|
619
|
|
Total operating lease cost
|
$
|
2,361
|
|
|
$
|
2,886
|
|
Supplemental information related to operating leases is as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2019
|
|
2020
|
Cash payments for operating leases
|
$
|
1,661
|
|
|
$
|
2,004
|
|
New operating lease assets obtained in exchange for operating lease liabilities
|
$
|
4,391
|
|
|
$
|
2,765
|
|
|
|
|
|
|
|
|
|
As of December 31, 2020, our operating leases had a weighted average remaining lease term of 9 years and a weighted average discount rate of 2.6%. Future lease payments under operating leases as of December 31, 2020 were as follows (in millions):
|
|
|
|
|
|
|
|
2021
|
$
|
2,198
|
|
|
|
2022
|
2,170
|
|
|
|
2023
|
1,995
|
|
|
|
2024
|
1,738
|
|
|
|
2025
|
1,389
|
|
|
|
Thereafter
|
5,601
|
|
|
|
Total future lease payments
|
15,091
|
|
|
|
Less imputed interest
|
(2,251)
|
|
|
|
Total lease liability balance
|
$
|
12,840
|
|
|
|
As of December 31, 2020, we have entered into leases that have not yet commenced with future lease payments of $8.0 billion, excluding purchase options, that are not yet recorded on our Consolidated Balance Sheets. These leases will commence between 2021 and 2026 with non-cancelable lease terms of 1 to 25 years.
Note 5. Variable Interest Entities
Consolidated VIEs
We consolidate VIEs in which we hold a variable interest and are the primary beneficiary. The results of operations and 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, 2019 and 2020, assets that can only be used to settle obligations of these VIEs were $3.1 billion and $5.7 billion, respectively, and the liabilities for which creditors only have recourse to the VIEs were $1.2 billion and $2.3 billion, respectively.
Total noncontrolling interests ("NCI"), including redeemable noncontrolling interests ("RNCI"), in our consolidated subsidiaries increased from $1.2 billion to $3.9 billion from December 31, 2019 to December 31, 2020, primarily due to external investments in Waymo. NCI and RNCI are included within additional paid-in capital. Net loss attributable to noncontrolling interests was not material for any period presented and is included within other income (expense), net.
Waymo
Waymo is an autonomous driving technology development company with a mission to make it safe and easy for people and things to get where they're going. In the first half of 2020, Waymo completed an externally led investment round raising in total $3.2 billion, which includes investment from Alphabet. No gain or loss was recognized. The investments related to external parties were accounted for as equity transactions and resulted in recognition of noncontrolling interests.
Unconsolidated VIEs
We have investments in some VIEs in which we are not the primary beneficiary. These VIEs include private companies that are primarily early stage companies and certain renewable energy entities in which 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 affect their economic performance. Therefore, we are not the primary beneficiary, and the results of operations and financial position of these VIEs are not included in our consolidated financial statements. We account for these investments as non-marketable equity investments or equity method investments.
VIEs are generally based on the current carrying value of the investments and any future funding commitments. We have determined that the single source of our exposure to these VIEs is our capital investments in them. The carrying value and maximum exposure of these unconsolidated VIEs were not material as of December 31, 2019 and 2020.
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, 2019 and 2020.
Our short-term debt balance also includes the current portion of certain long-term debt.
Long-Term Debt
In August 2020, Alphabet issued $10.0 billion of fixed-rate senior unsecured notes in six tranches (collectively, “2020 Notes”): $1.0 billion due in 2025, $1.0 billion due in 2027, $2.25 billion due in 2030, $1.25 billion due in 2040, $2.5 billion due in 2050 and $2.0 billion due in 2060. The 2020 Notes had a weighted average duration of 21.5 years and weighted average coupon rate of 1.57%. Of the total issuance, $5.75 billion was designated as Sustainability Bonds, the net proceeds of which are used to fund environmentally and socially responsible projects in the following eight areas: energy efficiency, clean energy, green buildings, clean transportation, circular economy and design, affordable housing, commitment to racial equity, and support for small businesses and COVID-19 crisis response. The remaining net proceeds are used for general corporate purposes.
The total outstanding debt is summarized below (in millions, except percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maturity
|
|
Coupon Rate
|
|
Effective Interest Rate
|
|
As of December 31, 2019
|
|
As of
December 31, 2020
|
Debt
|
|
|
|
|
|
|
|
|
|
|
2011-2016 Notes Issuances
|
|
2021 - 2026
|
|
2.00% - 3.63%
|
|
2.23% - 3.73%
|
|
$
|
4,000
|
|
|
$
|
4,000
|
|
2020 Notes Issuance
|
|
2025 - 2060
|
|
0.45% - 2.25%
|
|
0.57% - 2.33%
|
|
0
|
|
|
10,000
|
|
Future finance lease payments, net(1)
|
|
|
|
|
|
|
|
711
|
|
|
1,201
|
|
Total debt
|
|
|
|
|
|
|
|
4,711
|
|
|
15,201
|
|
Unamortized discount and debt issuance costs
|
|
|
|
|
|
|
|
(42)
|
|
|
(169)
|
|
Less: Current portion of Notes(2)
|
|
|
|
|
|
|
|
0
|
|
|
(999)
|
|
Less: Current portion future finance lease payments, net(1)(2)
|
|
|
|
|
|
|
|
(115)
|
|
|
(101)
|
|
Total long-term debt
|
|
|
|
|
|
|
|
$
|
4,554
|
|
|
$
|
13,932
|
|
(1)Net of imputed interest.
(2)Total current portion of long-term debt is included within other accrued expenses and current liabilities. See Note 7.
The notes in the table above are comprised of fixed-rate senior unsecured obligations and generally rank equally with each other. We may redeem the notes at any time in whole or in part at specified redemption prices. The effective interest rates are based on proceeds received with interest payable semi-annually.
The total estimated fair value of the outstanding notes, including the current portion, was approximately $4.1 billion and $14.0 billion as of December 31, 2019 and December 31, 2020, respectively. 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, 2020, the aggregate future principal payments for long-term debt, including finance lease liabilities, for each of the next five years and thereafter are as follows (in millions):
|
|
|
|
|
|
|
|
|
2021
|
|
$
|
1,104
|
|
2022
|
|
86
|
2023
|
|
86
|
2024
|
|
1,087
|
2025
|
|
1,088
|
Thereafter
|
|
11,868
|
Total
|
|
$
|
15,319
|
|
Credit Facility
As of December 31, 2020, we have $4.0 billion of revolving credit facilities which expire in July 2023. The interest rate for the credit facilities is determined based on a formula using certain market rates. No amounts were outstanding under the credit facilities as of December 31, 2019 and 2020.
Note 7. Supplemental Financial Statement Information
Property and Equipment, Net
Property and equipment, net, consisted of the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
December 31, 2019
|
|
As of
December 31, 2020
|
Land and buildings
|
$
|
39,865
|
|
|
$
|
49,732
|
|
Information technology assets
|
36,840
|
|
|
45,906
|
|
Construction in progress
|
21,036
|
|
|
23,111
|
|
Leasehold improvements
|
6,310
|
|
|
7,516
|
|
Furniture and fixtures
|
156
|
|
|
197
|
|
Property and equipment, gross
|
104,207
|
|
|
126,462
|
|
Less: accumulated depreciation
|
(30,561)
|
|
|
(41,713)
|
|
Property and equipment, net
|
$
|
73,646
|
|
|
$
|
84,749
|
|
Accrued expenses and other current liabilities
Accrued expenses and other current liabilities consisted of the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
December 31, 2019
|
|
As of
December 31, 2020
|
|
|
|
|
|
|
|
|
European Commission fines(1)
|
$
|
9,405
|
|
|
$
|
10,409
|
|
Accrued customer liabilities
|
2,245
|
|
|
3,118
|
|
Accrued purchases of property and equipment
|
2,411
|
|
|
2,197
|
|
Current operating lease liabilities
|
1,199
|
|
|
1,694
|
|
Other accrued expenses and current liabilities
|
7,807
|
|
|
11,213
|
|
Accrued expenses and other current liabilities
|
$
|
23,067
|
|
|
$
|
28,631
|
|
(1) Includes the effects of foreign exchange and interest. See Note 10 for further details.
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, 2017
|
$
|
(1,103)
|
|
|
$
|
233
|
|
|
$
|
(122)
|
|
|
$
|
(992)
|
|
Cumulative effect of accounting change
|
0
|
|
|
(98)
|
|
|
0
|
|
|
(98)
|
|
Other comprehensive income (loss) before reclassifications
|
(781)
|
|
|
88
|
|
|
264
|
|
|
(429)
|
|
Amounts excluded from the assessment of hedge effectiveness recorded in AOCI
|
0
|
|
|
0
|
|
|
26
|
|
|
26
|
|
Amounts reclassified from AOCI
|
0
|
|
|
(911)
|
|
|
98
|
|
|
(813)
|
|
Other comprehensive income (loss)
|
(781)
|
|
|
(823)
|
|
|
388
|
|
|
(1,216)
|
|
Balance as of December 31, 2018
|
(1,884)
|
|
|
(688)
|
|
|
266
|
|
|
(2,306)
|
|
Cumulative effect of accounting change
|
0
|
|
|
0
|
|
|
(30)
|
|
|
(30)
|
|
Other comprehensive income (loss) before reclassifications
|
(119)
|
|
|
1,611
|
|
|
36
|
|
|
1,528
|
|
Amounts excluded from the assessment of hedge effectiveness recorded in AOCI
|
0
|
|
|
0
|
|
|
(14)
|
|
|
(14)
|
|
Amounts reclassified from AOCI
|
0
|
|
|
(111)
|
|
|
(299)
|
|
|
(410)
|
|
Other comprehensive income (loss)
|
(119)
|
|
|
1,500
|
|
|
(277)
|
|
|
1,104
|
|
Balance as of December 31, 2019
|
(2,003)
|
|
|
812
|
|
|
(41)
|
|
|
(1,232)
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss) before reclassifications
|
1,139
|
|
|
1,313
|
|
|
79
|
|
|
2,531
|
|
Amounts excluded from the assessment of hedge effectiveness recorded in AOCI
|
0
|
|
|
0
|
|
|
(37)
|
|
|
(37)
|
|
Amounts reclassified from AOCI
|
0
|
|
|
(513)
|
|
|
(116)
|
|
|
(629)
|
|
Other comprehensive income (loss)
|
1,139
|
|
|
800
|
|
|
(74)
|
|
|
1,865
|
|
Balance as of December 31, 2020
|
$
|
(864)
|
|
|
$
|
1,612
|
|
|
$
|
(115)
|
|
|
$
|
633
|
|
The effects on net income of amounts reclassified from AOCI were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gains (Losses) Reclassified from AOCI to the Consolidated Statements of Income
|
|
|
|
|
|
Year Ended December 31,
|
|
AOCI Components
|
|
Location
|
|
2018
|
|
2019
|
|
2020
|
|
Unrealized gains (losses) on available-for-sale investments
|
|
|
|
|
|
|
|
|
|
Other income (expense), net
|
|
$
|
1,190
|
|
|
$
|
149
|
|
|
$
|
650
|
|
|
|
|
Benefit (provision) for income taxes
|
|
(279)
|
|
|
(38)
|
|
|
(137)
|
|
|
|
|
Net of tax
|
|
911
|
|
|
111
|
|
|
513
|
|
|
Unrealized gains (losses) on cash flow hedges
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
|
Revenue
|
|
(139)
|
|
|
367
|
|
|
144
|
|
|
Interest rate contracts
|
|
Other income (expense), net
|
|
6
|
|
|
6
|
|
|
6
|
|
|
|
|
Benefit (provision) for income taxes
|
|
35
|
|
|
(74)
|
|
|
(34)
|
|
|
|
|
Net of tax
|
|
(98)
|
|
|
299
|
|
|
116
|
|
|
Total amount reclassified, net of tax
|
|
|
|
$
|
813
|
|
|
$
|
410
|
|
|
$
|
629
|
|
|
Other Income (Expense), Net
The components of other income (expense), net, were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2018
|
|
2019
|
|
2020
|
Interest income
|
$
|
1,878
|
|
|
$
|
2,427
|
|
|
$
|
1,865
|
|
Interest expense(1)
|
(114)
|
|
|
(100)
|
|
|
(135)
|
|
Foreign currency exchange gain (loss), net (2)
|
(80)
|
|
|
103
|
|
|
(344)
|
|
Gain (loss) on debt securities, net(3)
|
1,190
|
|
|
149
|
|
|
725
|
|
Gain (loss) on equity securities, net
|
5,460
|
|
|
2,649
|
|
|
5,592
|
|
Performance fees
|
(1,203)
|
|
|
(326)
|
|
|
(609)
|
|
Income (loss) and impairment from equity method investments, net
|
(120)
|
|
|
390
|
|
|
401
|
|
Other(4)
|
378
|
|
|
102
|
|
|
(637)
|
|
Other income (expense), net
|
$
|
7,389
|
|
|
$
|
5,394
|
|
|
$
|
6,858
|
|
(1) Interest expense is net of interest capitalized of $92 million, $167 million, and $218 million for the years ended December 31, 2018, 2019, and 2020, respectively.
(2) Our foreign currency exchange gain (loss), net, is primarily related to the forward points for our foreign currency hedging contracts and foreign exchange transaction gains and losses from the conversion of the transaction currency to the functional currency, offset by the foreign currency hedging contracts' losses and gains.
(3) During the year ended December 31, 2018, the terms of a non-marketable debt security were modified resulting in an unrealized $1.3 billion gain.
(4) During the year ended December 31, 2020, we entered into derivatives that hedged the changes in fair value of certain marketable equity securities, which resulted in a $902 million loss. The offsetting recognized gains on the marketable equity securities are reflected in Gain (loss) on equity securities, net.
Note 8. Acquisitions
2020 Acquisitions
During the year ended December 31, 2020, we completed acquisitions and purchases of intangible assets for total consideration of approximately $744 million, net of cash acquired. In aggregate, $248 million was attributed to intangible assets, $446 million to goodwill and $50 million to net assets acquired. These acquisitions generally enhance the breadth and depth of our offerings and expand our expertise in engineering and other functional areas.
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 the aggregate.
For all intangible assets acquired and purchased during the year ended December 31, 2020, patents and developed technology have a weighted-average useful life of 4.1 years, customer relationships have a weighted-average useful life of 4.7 years, and trade names and other have a weighted-average useful life of 4.6 years.
Acquisition of Fitbit
In January 2021, we closed the acquisition of Fitbit, a leading wearables brand for $2.1 billion.
Note 9. Goodwill and Other Intangible Assets
Goodwill
Changes in the carrying amount of goodwill for the years ended December 31, 2019 and 2020 were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Google
|
|
Google Services
|
|
Google Cloud
|
|
Other Bets
|
|
Total
|
Balance as of December 31, 2018
|
$
|
17,521
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
367
|
|
|
$
|
17,888
|
|
Acquisitions
|
2,353
|
|
|
0
|
|
|
0
|
|
|
475
|
|
|
2,828
|
|
Transfers
|
9
|
|
|
0
|
|
|
0
|
|
|
(9)
|
|
|
0
|
|
Foreign currency translation and other adjustments
|
38
|
|
|
0
|
|
|
0
|
|
|
(130)
|
|
|
(92)
|
|
Balance as of December 31, 2019
|
19,921
|
|
|
0
|
|
|
0
|
|
|
703
|
|
|
20,624
|
|
Acquisitions
|
204
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
204
|
|
Foreign currency translation and other adjustments
|
46
|
|
|
0
|
|
|
0
|
|
|
(4)
|
|
|
42
|
|
Allocation in the fourth quarter of 2020(1)
|
(20,171)
|
|
|
18,408
|
|
|
1,763
|
|
|
0
|
|
|
0
|
|
Acquisitions
|
0
|
|
|
53
|
|
|
189
|
|
|
0
|
|
|
242
|
|
Foreign currency translation and other adjustments
|
0
|
|
|
56
|
|
|
5
|
|
|
2
|
|
|
63
|
|
Balance as of December 31, 2020
|
$
|
0
|
|
|
$
|
18,517
|
|
|
$
|
1,957
|
|
|
$
|
701
|
|
|
$
|
21,175
|
|
(1)Represents reallocation of goodwill as a result of our change in segments in the fourth quarter of 2020. See Note 15 for further details
Other Intangible Assets
Information regarding purchased intangible assets were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2019
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net
Carrying
Amount
|
Patents and developed technology
|
$
|
4,972
|
|
|
$
|
3,570
|
|
|
$
|
1,402
|
|
Customer relationships
|
254
|
|
|
30
|
|
|
224
|
|
Trade names and other
|
703
|
|
|
350
|
|
|
353
|
|
Total
|
$
|
5,929
|
|
|
$
|
3,950
|
|
|
$
|
1,979
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2020
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net
Carrying
Value
|
Patents and developed technology
|
$
|
4,639
|
|
|
$
|
3,649
|
|
|
$
|
990
|
|
Customer relationships
|
266
|
|
|
49
|
|
|
217
|
|
Trade names and other
|
699
|
|
|
461
|
|
|
238
|
|
Total
|
$
|
5,604
|
|
|
$
|
4,159
|
|
|
$
|
1,445
|
|
Patents and developed technology, customer relationships, and trade names and other have weighted-average remaining useful lives of 1.6 years, 4.9 years, and 2.1 years, respectively.
Amortization expense relating to purchased intangible assets was $865 million, $795 million, and $774 million for the years ended December 31, 2018, 2019, and 2020, respectively.
As of December 31, 2020, expected amortization expense relating to purchased intangible assets for each of the next five years and thereafter is as follows (in millions):
|
|
|
|
|
|
2021
|
$
|
719
|
|
2022
|
375
|
|
2023
|
104
|
|
2024
|
78
|
|
2025
|
53
|
|
Thereafter
|
116
|
|
|
$
|
1,445
|
|
Note 10. Commitments and Contingencies
Purchase Obligations
As of December 31, 2020, we had $10.7 billion of other non-cancelable contractual obligations, primarily related to data center operations and build-outs, digital media content licensing, information technology assets 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, customers of Google Cloud offerings, 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, 2020, we did not have any material indemnification claims that were probable or reasonably possible.
Legal Matters
Antitrust Investigations
On November 30, 2010, the EC's Directorate General for Competition opened an investigation into various antitrust-related complaints against us.
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 €2.4 billion ($2.7 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 $2.7 billion for the fine in the second quarter of 2017.
On July 18, 2018, the EC announced its decision that certain provisions in Google’s Android-related distribution agreements infringed European competition law. The EC decision imposed a €4.3 billion ($5.1 billion as of June 30, 2018) fine and directed the termination of the conduct at issue. On October 9, 2018, we appealed the EC decision. On October 29, 2018, we implemented changes to certain of our Android distribution practices. We recognized a charge of $5.1 billion for the fine in the second quarter of 2018.
On March 20, 2019, the EC announced its decision that certain contractual provisions in agreements that Google had with AdSense for Search partners infringed European competition law. The EC decision imposed a fine of €1.5 billion ($1.7 billion as of March 20, 2019) and directed actions related to AdSense for Search partners' agreements, which we implemented prior to the decision. On June 4, 2019, we appealed the EC decision. We recognized a charge of $1.7 billion for the fine in the first quarter of 2019.
While each EC decision is under appeal, we included the fines 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 fines.
From time to time we are subject to formal and informal inquiries and investigations on competition matters by regulatory authorities in the United States, Europe, and other jurisdictions. For example, in August 2019, we began receiving civil investigative demands from the U.S. Department of Justice ("DOJ") requesting information and documents relating to our prior antitrust investigations and certain aspects of our business. The DOJ and a number of state Attorneys General filed a lawsuit on October 20, 2020 alleging that Google violated U.S. antitrust laws relating to Search and Search advertising. Separately, on December 16, 2020, a number of state Attorneys General filed an antitrust complaint against Google in the United States District Court for the Eastern District of Texas, alleging that Google violated U.S. antitrust laws as well as state deceptive trade laws relating to its advertising technology. We believe these complaints are without merit and will defend ourselves vigorously. The DOJ and state Attorneys General continue their investigations into certain aspects of our business. We continue to cooperate with federal and state regulators in the United States, and other regulators around the world.
Patent and Intellectual Property Claims
We have had patent, copyright, trade secret, and trademark infringement lawsuits filed against us claiming that certain of our products, services, and technologies infringe others' intellectual property rights. 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. As a result, we may have to change our business practices, and develop 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 in an ITC action can 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 against certain intellectual property infringement claims, 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. In addition, 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 affect our business.
In 2010, 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 appealed and on March 27, 2018, the appeals court reversed and remanded the case for a trial on damages. On May 29, 2018, we filed a petition for a rehearing at the Federal Circuit, and on August 28, 2018, the Federal Circuit denied the petition. On January 24, 2019, we filed a petition to the Supreme Court of the United States to review this case. On April 29, 2019, the Supreme Court requested the views of the Solicitor General regarding our petition. On September 27, 2019, the Solicitor General recommended denying our petition, and we provided our response on October 16, 2019. On November 15, 2019, the Supreme Court granted our petition and made a decision to review the case. The Supreme Court heard oral arguments in our case on October 7, 2020. If the Supreme Court does not rule in our favor, the case will be remanded to the district court for further determination of the remaining issues in the case, including damages, if any. 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, intellectual property, privacy, tax and related compliance, 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 substantial fines and penalties, injunctive relief, ongoing auditing and monitoring obligations, changes to our products and services, alterations to our business models and operations, and collateral related civil litigation or other adverse consequences, all of which could harm our business, reputation, financial condition, and operating results.
Certain of these outstanding matters include speculative, substantial or indeterminate monetary amounts. 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 matters, based on our current knowledge, we believe that the amount or range of reasonably possible loss will not, either individually or in aggregate, have a material adverse effect on our business, consolidated financial position, results of operations, or cash flows. However, the outcome of such 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. 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, 2019 and 2020, 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 July 2020, the Board of Directors of Alphabet authorized the company to repurchase up to an additional $28.0 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 the years ended December 31, 2019 and 2020, we repurchased and subsequently retired 15.3 million and 21.5 million shares of Alphabet Class C capital stock for an aggregate amount of $18.4 billion and $31.1 billion, respectively.
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.
In the years ended December 31, 2018, 2019 and 2020, 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 entitled to equal per share dividends or distributions in liquidation in accordance with the Amended and Restated Certificate of Incorporation of Alphabet Inc.
The following tables set 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,
|
|
2018
|
|
Class A
|
|
Class B
|
|
Class C
|
Basic net income per share:
|
|
|
|
|
|
Numerator
|
|
|
|
|
|
|
|
|
|
|
|
Allocation of undistributed earnings
|
$
|
13,200
|
|
|
$
|
2,072
|
|
|
$
|
15,464
|
|
Denominator
|
|
|
|
|
|
Number of shares used in per share computation
|
298,548
|
|
|
46,864
|
|
|
349,728
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income per share
|
$
|
44.22
|
|
|
$
|
44.22
|
|
|
$
|
44.22
|
|
Diluted net income per share:
|
|
|
|
|
|
Numerator
|
|
|
|
|
|
Allocation of undistributed earnings for basic computation
|
$
|
13,200
|
|
|
$
|
2,072
|
|
|
$
|
15,464
|
|
Reallocation of undistributed earnings as a result of conversion of Class B to Class A shares
|
2,072
|
|
|
0
|
|
|
0
|
|
Reallocation of undistributed earnings
|
(146)
|
|
|
(24)
|
|
|
146
|
|
|
|
|
|
|
|
Allocation of undistributed earnings
|
$
|
15,126
|
|
|
$
|
2,048
|
|
|
$
|
15,610
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator
|
|
|
|
|
|
Number of shares used in basic computation
|
298,548
|
|
|
46,864
|
|
|
349,728
|
|
Weighted-average effect of dilutive securities
|
|
|
|
|
|
Add:
|
|
|
|
|
|
Conversion of Class B to Class A common shares outstanding
|
46,864
|
|
|
0
|
|
|
0
|
|
|
|
|
|
|
|
Restricted stock units and other contingently issuable shares
|
689
|
|
|
0
|
|
|
7,456
|
|
Number of shares used in per share computation
|
346,101
|
|
|
46,864
|
|
|
357,184
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income per share
|
$
|
43.70
|
|
|
$
|
43.70
|
|
|
$
|
43.70
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2019
|
|
Class A
|
|
Class B
|
|
Class C
|
Basic net income per share:
|
|
|
|
|
|
Numerator
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allocation of undistributed earnings
|
$
|
14,846
|
|
|
$
|
2,307
|
|
|
$
|
17,190
|
|
Denominator
|
|
|
|
|
|
Number of shares used in per share computation
|
299,402
|
|
|
46,527
|
|
|
346,667
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income per share
|
$
|
49.59
|
|
|
$
|
49.59
|
|
|
$
|
49.59
|
|
Diluted net income per share:
|
|
|
|
|
|
Numerator
|
|
|
|
|
|
Allocation of undistributed earnings for basic computation
|
$
|
14,846
|
|
|
$
|
2,307
|
|
|
$
|
17,190
|
|
Reallocation of undistributed earnings as a result of conversion of Class B to Class A shares
|
2,307
|
|
|
0
|
|
|
0
|
|
Reallocation of undistributed earnings
|
(126)
|
|
|
(20)
|
|
|
126
|
|
Allocation of undistributed earnings
|
$
|
17,027
|
|
|
$
|
2,287
|
|
|
$
|
17,316
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator
|
|
|
|
|
|
Number of shares used in basic computation
|
299,402
|
|
|
46,527
|
|
|
346,667
|
|
Weighted-average effect of dilutive securities
|
|
|
|
|
|
Add:
|
|
|
|
|
|
Conversion of Class B to Class A common shares outstanding
|
46,527
|
|
|
0
|
|
|
0
|
|
|
|
|
|
|
|
Restricted stock units and other contingently issuable shares
|
413
|
|
|
0
|
|
|
5,547
|
|
Number of shares used in per share computation
|
346,342
|
|
|
46,527
|
|
|
352,214
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income per share
|
$
|
49.16
|
|
|
$
|
49.16
|
|
|
$
|
49.16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2020
|
|
Class A
|
|
Class B
|
|
Class C
|
Basic net income per share:
|
|
|
|
|
|
Numerator
|
|
|
|
|
|
Allocation of undistributed earnings
|
$
|
17,733
|
|
|
$
|
2,732
|
|
|
$
|
19,804
|
|
Denominator
|
|
|
|
|
|
Number of shares used in per share computation
|
299,815
|
|
|
46,182
|
|
|
334,819
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income per share
|
$
|
59.15
|
|
|
$
|
59.15
|
|
|
$
|
59.15
|
|
Diluted net income per share:
|
|
|
|
|
|
Numerator
|
|
|
|
|
|
|
|
|
|
|
|
Allocation of undistributed earnings for basic computation
|
$
|
17,733
|
|
|
$
|
2,732
|
|
|
$
|
19,804
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reallocation of undistributed earnings as a result of conversion of Class B to Class A shares
|
2,732
|
|
|
0
|
|
|
0
|
|
Reallocation of undistributed earnings
|
(180)
|
|
|
(25)
|
|
|
180
|
|
Allocation of undistributed earnings
|
$
|
20,285
|
|
|
$
|
2,707
|
|
|
$
|
19,984
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator
|
|
|
|
|
|
Number of shares used in basic computation
|
299,815
|
|
|
46,182
|
|
|
334,819
|
|
Weighted-average effect of dilutive securities
|
|
|
|
|
|
Add:
|
|
|
|
|
|
Conversion of Class B to Class A common shares outstanding
|
46,182
|
|
|
0
|
|
|
0
|
|
|
|
|
|
|
|
Restricted stock units and other contingently issuable shares
|
87
|
|
|
0
|
|
|
6,125
|
|
Number of shares used in per share computation
|
346,084
|
|
|
46,182
|
|
|
340,944
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income per share
|
$
|
58.61
|
|
|
$
|
58.61
|
|
|
$
|
58.61
|
|
Note 13. Compensation Plans
Stock Plans
Our stock plans include the Alphabet 2012 Stock Plan and Other Bet stock-based plans. Under our stock plans, RSUs and other types of awards may be granted. An RSU award is an agreement to issue shares of our publicly traded stock at the time the award vests. RSUs granted to participants under the Alphabet 2012 Stock Plan generally vest over four years contingent upon employment or service with us on the vesting date.
As of December 31, 2020, there were 38,777,813 shares of stock reserved for future issuance under our Alphabet 2012 Stock Plan.
Stock-Based Compensation
For the years ended December 31, 2018, 2019 and 2020, total stock-based compensation expense was $10.0 billion, $11.7 billion and $13.4 billion, including amounts associated with awards we expect to settle in Alphabet stock of $9.4 billion, $10.8 billion, and $12.8 billion, respectively.
For the years ended December 31, 2018, 2019 and 2020, 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 $1.5 billion, $1.8 billion, and $2.7 billion, respectively.
For the years ended December 31, 2018, 2019 and 2020, tax benefit realized related to awards vested or exercised during the period was $2.1 billion, $2.2 billion and $3.6 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 Alphabet RSUs for the year ended December 31, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
Unvested Restricted Stock Units
|
|
Number of
Shares
|
|
Weighted-
Average
Grant-Date
Fair Value
|
Unvested as of December 31, 2019
|
19,394,236
|
|
|
$
|
1,055.22
|
|
Granted
|
12,647,562
|
|
|
1,407.97
|
|
Vested
|
(11,643,670)
|
|
|
1,089.31
|
|
Forfeited/canceled
|
(1,109,335)
|
|
|
1,160.01
|
|
Unvested as of December 31, 2020
|
19,288,793
|
|
|
$
|
1,262.13
|
|
The weighted-average grant-date fair value of RSUs granted during the years ended December 31, 2018 and 2019, was $1,095.89 and $1,092.36, respectively. Total fair value of RSUs, as of their respective vesting dates, during the years ended December 31, 2018, 2019, and 2020 were $14.1 billion, $15.2 billion, and $17.8 billion, respectively.
As of December 31, 2020, there was $22.8 billion of unrecognized compensation cost related to unvested employee RSUs. This amount is expected to be recognized over a weighted-average period of 2.6 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 recognized expense of approximately $691 million, $724 million, and $855 million for the years ended December 31, 2018, 2019, and 2020, respectively.
Note 14. Income Taxes
Income from continuing operations before income taxes consists of the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2018
|
|
2019
|
|
2020
|
Domestic operations
|
$
|
15,779
|
|
|
$
|
16,426
|
|
|
$
|
37,576
|
|
Foreign operations
|
19,134
|
|
|
23,199
|
|
|
10,506
|
|
Total
|
$
|
34,913
|
|
|
$
|
39,625
|
|
|
$
|
48,082
|
|
The provision for income taxes consists of the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2018
|
|
2019
|
|
2020
|
Current:
|
|
|
|
|
|
Federal and state
|
$
|
2,153
|
|
|
$
|
2,424
|
|
|
$
|
4,789
|
|
|
|
|
|
|
|
Foreign
|
1,251
|
|
|
2,713
|
|
|
1,687
|
|
Total
|
3,404
|
|
|
5,137
|
|
|
6,476
|
|
Deferred:
|
|
|
|
|
|
Federal and state
|
907
|
|
|
286
|
|
|
1,552
|
|
|
|
|
|
|
|
Foreign
|
(134)
|
|
|
(141)
|
|
|
(215)
|
|
Total
|
773
|
|
|
145
|
|
|
1,337
|
|
Provision for income taxes
|
$
|
4,177
|
|
|
$
|
5,282
|
|
|
$
|
7,813
|
|
The reconciliation of federal statutory income tax rate to our effective income tax rate is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2018
|
|
2019
|
|
2020
|
U.S. federal statutory tax rate
|
21.0
|
%
|
|
21.0
|
%
|
|
21.0
|
%
|
Foreign income taxed at different rates
|
(4.4)
|
|
|
(4.9)
|
|
|
(0.3)
|
|
Foreign-derived intangible income deduction
|
(0.5)
|
|
|
(0.7)
|
|
|
(3.0)
|
|
Stock-based compensation expense
|
(2.2)
|
|
|
(0.7)
|
|
|
(1.7)
|
|
Federal research credit
|
(2.4)
|
|
|
(2.5)
|
|
|
(2.3)
|
|
Impact of the Tax Cuts and Jobs Act
|
(1.3)
|
|
|
(0.6)
|
|
|
0.0
|
|
European Commission fines
|
3.1
|
|
|
1.0
|
|
|
0.0
|
|
Deferred tax asset valuation allowance
|
(2.0)
|
|
|
0.0
|
|
|
1.4
|
|
State and local income taxes
|
(0.4)
|
|
|
1.1
|
|
|
1.1
|
|
Other adjustments
|
1.1
|
|
|
(0.4)
|
|
|
0.0
|
|
Effective tax rate
|
12.0
|
%
|
|
13.3
|
%
|
|
16.2
|
%
|
Our effective tax rate for 2018 and 2019 was affected significantly by earnings realized in foreign jurisdictions with statutory tax rates lower than the federal statutory tax rate because substantially all of the income from foreign operations was earned by an Irish subsidiary. As of December 31, 2019, we have simplified our corporate legal entity structure and now license intellectual property from the U.S. that was previously licensed from Bermuda resulting in an increase in the portion of our income earned in the U.S.
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. As a result of that decision, we recorded a tax benefit related to the anticipated reimbursement of cost share payment for previously shared stock-based compensation costs.
On June 7, 2019, the United States Court of Appeals for the Ninth Circuit overturned the 2015 Tax Court decision in Altera Corp. v. Commissioner, and upheld 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. As a result of the Ninth Circuit court decision, our cumulative net tax benefit of $418 million related to previously shared stock-based compensation costs was reversed in the year ended December 31, 2019.
In 2020, there was an increase in valuation allowance for net deferred tax assets that are not likely to be realized relating to certain of our Other Bets.
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. Significant components of our deferred tax assets and liabilities are as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
2019
|
|
2020
|
Deferred tax assets:
|
|
|
|
Stock-based compensation expense
|
$
|
421
|
|
|
$
|
518
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued employee benefits
|
463
|
|
|
580
|
|
Accruals and reserves not currently deductible
|
1,047
|
|
|
1,049
|
|
|
|
|
|
Tax credits
|
3,264
|
|
|
3,723
|
|
Net operating losses
|
771
|
|
|
1,085
|
|
Operating leases
|
1,876
|
|
|
2,620
|
|
Intangible assets
|
164
|
|
|
1,525
|
|
Other
|
226
|
|
|
463
|
|
Total deferred tax assets
|
8,232
|
|
|
11,563
|
|
Valuation allowance
|
(3,502)
|
|
|
(4,823)
|
|
Total deferred tax assets net of valuation allowance
|
4,730
|
|
|
6,740
|
|
Deferred tax liabilities:
|
|
|
|
Property and equipment, net
|
(1,798)
|
|
|
(3,382)
|
|
|
|
|
|
Renewable energy investments
|
(466)
|
|
|
(415)
|
|
Foreign Earnings
|
(373)
|
|
|
(383)
|
|
Net investment gains
|
(1,074)
|
|
|
(1,901)
|
|
Operating leases
|
(1,619)
|
|
|
(2,354)
|
|
Other
|
(380)
|
|
|
(782)
|
|
Total deferred tax liabilities
|
(5,710)
|
|
|
(9,217)
|
|
Net deferred tax assets (liabilities)
|
$
|
(980)
|
|
|
$
|
(2,477)
|
|
As of December 31, 2020, our federal, state and foreign net operating loss carryforwards for income tax purposes were approximately $3.1 billion, $3.1 billion, and $1.4 billion respectively. If not utilized, the federal net operating loss carryforwards will begin to expire in 2023, foreign net operating loss carryforwards will begin to expire in 2024 and the state net operating loss carryforwards will begin to expire in 2028. It is more likely than not that certain 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.
As of December 31, 2020, our California research and development credit carryforwards for income tax purposes were approximately $3.7 billion that can be carried over indefinitely. We believe the state tax credit is not likely to be realized.
As of December 31, 2020, we maintained a valuation allowance with respect to California deferred tax assets, certain federal net operating losses, certain state tax credits, net deferred tax assets relating to certain of our Other Bets, and certain foreign net operating losses that we believe are not likely to be realized. We continue to reassess the remaining 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 (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2018
|
|
2019
|
|
2020
|
Beginning gross unrecognized tax benefits
|
$
|
4,696
|
|
|
$
|
4,652
|
|
|
$
|
3,377
|
|
Increases related to prior year tax positions
|
321
|
|
|
938
|
|
|
372
|
|
Decreases related to prior year tax positions
|
(623)
|
|
|
(143)
|
|
|
(557)
|
|
Decreases related to settlement with tax authorities
|
(191)
|
|
|
(2,886)
|
|
|
(45)
|
|
Increases related to current year tax positions
|
449
|
|
|
816
|
|
|
690
|
|
Ending gross unrecognized tax benefits
|
$
|
4,652
|
|
|
$
|
3,377
|
|
|
$
|
3,837
|
|
The total amount of gross unrecognized tax benefits was $4.7 billion, $3.4 billion, and $3.8 billion as of December 31, 2018, 2019, and 2020, respectively, of which, $2.9 billion, $2.3 billion, and $2.6 billion, if recognized, would affect our effective tax rate, respectively. The decrease in gross unrecognized tax benefits in 2019 was primarily as a result of the resolution of multi-year audits.
As of December 31, 2019 and 2020, we accrued $130 million and $222 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 is currently examining our 2016 through 2018 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.
The tax years 2011 through 2019 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 effect, 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, and closure of audits is not certain, we do not believe it is reasonably possible that our unrecognized tax benefits will materially change in the next 12 months.
Note 15. Information about Segments and Geographic Areas
Beginning in the fourth quarter of 2020, we report our segment results as Google Services, Google Cloud, and Other Bets:
•Google Services includes products and services such as ads, Android, Chrome, hardware, Google Maps, Google Play, Search, and YouTube. Google Services generates revenues primarily from advertising; sales of apps, in-app purchases, digital content products, and hardware; and fees received for subscription-based products such as YouTube Premium and YouTube TV.
•Google Cloud includes Google’s infrastructure and data analytics platforms, collaboration tools, and other services for enterprise customers. Google Cloud generates revenues primarily from fees received for Google Cloud Platform services and Google Workspace (formerly known as G Suite) collaboration tools.
•Other Bets is a combination of multiple operating segments that are not individually material. Revenues from the Other Bets are derived primarily through the sale of internet services as well as licensing and R&D services.
Revenues and certain costs, such as costs associated with content and traffic acquisition, certain engineering, and hardware costs and other operating expenses, are directly attributable to our segments. Due to the integrated nature of Alphabet, other costs and expenses, such as technical infrastructure and office facilities, are managed
centrally at a consolidated level. The associated costs, including depreciation and impairment, are allocated to operating segments as a service cost generally based on usage or headcount.
Unallocated corporate costs primarily include corporate initiatives, corporate shared costs, such as finance and legal, including fines and settlements, as well as costs associated with certain shared research and development activities. Additionally, hedging gains (losses) related to revenue are included in corporate costs.
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). For comparative purposes, amounts in prior periods have been recast:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2018
|
|
2019
|
|
2020
|
Revenues:
|
|
|
|
|
|
Google Services
|
$
|
130,524
|
|
|
$
|
151,825
|
|
|
$
|
168,635
|
|
Google Cloud
|
5,838
|
|
|
8,918
|
|
|
13,059
|
|
Other Bets
|
595
|
|
|
659
|
|
|
657
|
|
Hedging gains (losses)
|
(138)
|
|
|
455
|
|
|
176
|
|
Total revenues
|
$
|
136,819
|
|
|
$
|
161,857
|
|
|
$
|
182,527
|
|
|
|
|
|
|
|
|
|
Operating income (loss):
|
|
|
|
|
|
Google Services
|
$
|
43,137
|
|
|
$
|
48,999
|
|
|
$
|
54,606
|
|
Google Cloud
|
(4,348)
|
|
|
(4,645)
|
|
|
(5,607)
|
|
Other Bets
|
(3,358)
|
|
|
(4,824)
|
|
|
(4,476)
|
|
Corporate costs, unallocated(1)
|
(7,907)
|
|
|
(5,299)
|
|
|
(3,299)
|
|
Total income from operations
|
$
|
27,524
|
|
|
$
|
34,231
|
|
|
$
|
41,224
|
|
(1) Corporate costs, unallocated includes a fine of $5.1 billion for the year ended December 31, 2018 and a fine and legal settlement totaling $2.3 billion for the year ended December 31, 2019.
For revenues by geography, see Note 2.
The following table presents certain of our long-lived assets by geographic area, which includes property and equipment, net and operating lease assets (in millions).
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
December 31, 2019
|
|
As of
December 31, 2020
|
Long-lived assets:
|
|
|
|
United States
|
$
|
63,102
|
|
|
$
|
69,315
|
|
International
|
21,485
|
|
|
27,645
|
|
Total long-lived assets
|
$
|
84,587
|
|
|
$
|
96,960
|
|