Fair Value Measurement of Assets and Liabilities

6 Months Ended

Jun. 30, 2020

Fair Value Measurement of Assets and Liabilities

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


	June 30, 2020		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:
Cash and cash equivalents	$	1,006	$	906	$	100	$	—
Short-term investments:
Restricted cash	19		19		—		—
Corporate debt securities	3,869		—		3,869		—
Government and agency securities	409		—		409		—


Total short-term investments	4,297		19		4,278		—

Derivatives	681		—		95		586
Long-term investments:
Corporate debt securities	534		—		534		—

Total long-term investments	534		—		534		—
Total financial assets	$	6,518	$	925	$	5,007	$	586

Liabilities:
Derivatives	$	31	$	—	$	31	$	—


	December 31, 2019		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:
Cash and cash equivalents	$	923	$	923	$	—	$	—
Short-term investments:
Restricted cash	21		21		—		—
Corporate debt securities	1,654		—		1,654		—
Government and agency securities	175		—		175		—


Total short-term investments	1,850		21		1,829		—

Derivatives	347		—		66		281
Long-term investments:
Corporate debt securities	961		—		961		—

Total long-term investments	961		—		961		—
Total financial assets	$	4,081	$	944	$	2,856	$	281

Liabilities:
Derivatives	$	23	$	—	$	23	$	—

Our financial assets and liabilities are valued using market prices on both active markets (Level 1), less active markets (Level 2) and little or no market activity (Level 3). Level 1 instrument valuations are obtained from real-time quotes for transactions in active exchange markets involving identical assets. Level 2 instrument valuations are obtained from readily available pricing sources for comparable instruments, identical instruments in less active markets, or models using market observable inputs. Level 3 instrument valuations typically reflect management’s estimate of assumptions that market participants would use in pricing the asset or liability. We did not have any transfers of financial instruments between valuation levels during the six months ended June 30, 2020.

The majority of our derivative instruments are valued using pricing models that take into account the contract terms as well as multiple inputs where applicable, such as equity prices, interest rate yield curves, option volatility and currency rates. Our warrant, which is accounted for as a derivative instrument, is valued using a Black-Scholes model. Key assumptions used in the valuation include risk-free interest rates; Adyen’s common stock price, equity volatility and common stock outstanding; exercise price; and details specific to the warrant. The value is also probability adjusted for management’s assumptions with respect to vesting of the four tranches which are each subject to meeting processing volume milestone targets. These assumptions and the probability of meeting processing volume milestone targets may have a significant impact on the value of the warrant. Refer to “Note 8 – Derivative Instruments” for further details on our derivative instruments.

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

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


	June 30, 2020
Opening balance as of January 1, 2020	$	281

Change in fair value	305
Closing balance as of June 30, 2020	$	586


	December 31, 2019
Opening balance as of January 1, 2019	$	148

Change in fair value	133
Closing balance as of December 31, 2019	$	281

The following table presents quantitative information about Level 3 significant unobservable inputs used in the fair value measurement of the warrant as of June 30, 2020 (in millions):

Fair value

Valuation technique

Unobservable Input

Range (weighted average)⁽¹⁾

Warrant

586

Black-Scholes and Monte Carlo

Probability of vesting

0.0% - 90.0% (69%)

Equity volatility

21.0% - 57.5% (40%)

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

- Definition

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

+ References + Details