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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
☒
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2020.
OR
☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from             to             .
Commission file number 001-36859
   
PayPal Holdings, Inc.
(Exact Name of Registrant as Specified in Its Charter)
 
Delaware47-2989869
(State or Other Jurisdiction of
Incorporation or Organization)		(I.R.S. Employer
Identification No.)
2211 North First StreetSan Jose,California95131
(Address of Principal Executive Offices)(Zip Code)
(408) 967-1000
(Registrant’s telephone number, including area code)
  
Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of each exchange on which registered
Common stock, $0.0001 par value per sharePYPLNASDAQ Global Select Market
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ☒    No  ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  ☒    No  ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
1

Large accelerated filer☒Accelerated filer☐
Non-accelerated filer☐Smaller reporting company☐
Emerging growth company☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    
Yes☐ No  ☒
As of October 28, 2020, there were 1,171,691,809 shares of the registrant’s common stock, $0.0001 par value, outstanding, which is the only class of common or voting stock of the registrant issued.
2

PayPal Holdings, Inc.
TABLE OF CONTENTS
Page Number

3
PART I: FINANCIAL INFORMATION

Item 1: Financial Statements

PayPal Holdings, Inc.
CONDENSED CONSOLIDATED BALANCE SHEETS
 September 30,
2020		December 31,
2019
 (In millions, except par value)
(Unaudited)
ASSETS
Current assets:  
Cash and cash equivalents$6,112 $7,349 
Short-term investments8,046 3,412 
Accounts receivable, net482 435 
Loans and interest receivable, net of allowances of $819 and $258 as of September 30, 2020 and December 31, 2019, respectively
2,597 3,972 
Funds receivable and customer accounts30,530 22,527 
Prepaid expenses and other current assets937 800 
Total current assets48,704 38,495 
Long-term investments3,439 2,863 
Property and equipment, net1,757 1,693 
Goodwill9,119 6,212 
Intangible assets, net1,146 778 
Other assets1,417 1,292 
Total assets$65,582 $51,333 
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable$159 $232 
Funds payable and amounts due to customers32,530 24,527 
Accrued expenses and other current liabilities2,457 2,087 
Income taxes payable100 73 
Total current liabilities35,246 26,919 
Deferred tax liability and other long-term liabilities2,872 2,520 
Long-term debt8,937 4,965 
Total liabilities47,055 34,404 
Commitments and Contingencies (Note 13)
Equity:
Common stock, $0.0001 par value; 4,000 shares authorized; 1,172 and 1,173 shares outstanding as of September 30, 2020 and December 31, 2019, respectively
— — 
Preferred stock, $0.0001 par value; 100 shares authorized, unissued
— — 
Treasury stock at cost, 116 and 105 shares as of September 30, 2020 and December 31, 2019, respectively
(8,242)(6,872)
Additional paid-in-capital16,248 15,588 
Retained earnings10,809 8,342 
Accumulated other comprehensive income (loss)(332)(173)
Total PayPal Stockholders’ equity18,483 16,885 
Noncontrolling interest44 44 
Total equity18,527 16,929 
Total liabilities and equity$65,582 $51,333 
The accompanying notes are an integral part of these condensed consolidated financial statements.
4
PayPal Holdings, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended September 30,Nine Months Ended September 30,
2020201920202019
 (In millions, except per share data)
(Unaudited)
Net revenues$5,459 $4,378 $15,338 $12,811 
Operating expenses:
Transaction expense 2,022 1,701 5,604 4,877 
Transaction and credit losses344 340 1,375 999 
Customer support and operations449 390 1,271 1,177 
Sales and marketing471 316 1,256 1,001 
Technology and development674 533 1,910 1,527 
General and administrative503 401 1,501 1,239 
Restructuring and other charges19 — 95 71 
Total operating expenses4,482 3,681 13,012 10,891 
Operating income977 697 2,326 1,920 
Other income (expense), net167 (213)880 224 
Income before income taxes1,144 484 3,206 2,144 
Income tax expense123 22 571 192 
Net income$1,021 $462 $2,635 $1,952 
Net income per share:
Basic$0.87 $0.39 $2.25 $1.66 
Diluted$0.86 $0.39 $2.22 $1.64 
Weighted average shares:
Basic1,172 1,175 1,173 1,174 
Diluted1,190 1,188 1,186 1,188 
The accompanying notes are an integral part of these condensed consolidated financial statements.

5
PayPal Holdings, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Three Months Ended September 30,Nine Months Ended September 30,
 2020201920202019
 (In millions)
(Unaudited)
Net income $1,021 $462 $2,635 $1,952 
Other comprehensive income (loss), net of reclassification adjustments:
Foreign currency translation adjustments (“CTA”)8 (90)(111)(148)
Net investment hedge CTA gain— — 55 — 
Unrealized (losses) gains on cash flow hedges, net(163)71 (111)7 
Tax benefit (expense) on unrealized (losses) gains on cash flow hedges, net2 (1)1 — 
Unrealized (losses) gains on investments, net(12)(5)10 16 
Tax benefit (expense) on unrealized (losses) gains on investments, net3 1 (3)(5)
Other comprehensive income (loss), net of tax(162)(24)(159)(130)
Comprehensive income$859 $438 $2,476 $1,822 
The accompanying notes are an integral part of these condensed consolidated financial statements.

6
PayPal Holdings, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
Common Stock SharesTreasury StockAdditional Paid-In CapitalAccumulated Other
Comprehensive Income (Loss)		Retained EarningsNoncontrolling InterestTotal 
Equity
 (In millions)
(Unaudited)
Balances at December 31, 20191,173 $(6,872)$15,588 $(173)$8,342 $44 $16,929 
Adoption of current expected credit loss standard— — — — (168)— (168)
Net income— — — — 84 — 84 
Foreign CTA— — — (171)— — (171)
Net investment hedge CTA gain— — — 71 — — 71 
Unrealized gains on cash flow hedges, net— — — 144 — — 144 
Tax expense on unrealized gains on cash flow hedges, net— — — (2)— — (2)
Unrealized gains on investments, net— — — 15 — — 15 
Tax expense on unrealized gains on investments, net— — — (4)— — (4)
Common stock and stock-based awards issued and assumed, net of shares withheld for employee taxes8 — (382)— — — (382)
Common stock repurchased(8)(800)— — — — (800)
Stock-based compensation— — 295 — — — 295 
Balances at March 31, 20201,173 $(7,672)$15,501 $(120)$8,258 $44 $16,011 
Net income— — — — 1,530 — 1,530 
Foreign CTA— — — 52 — — 52 
Net investment hedge CTA loss— — — (16)— — (16)
Unrealized losses on cash flow hedges, net— — — (92)— — (92)
Tax benefit on unrealized losses on cash flow hedges, net— — — 1 — — 1 
Unrealized gains on investments, net— — — 7 — — 7 
Tax expense on unrealized gains on investments, net— — — (2)— — (2)
Common stock and stock-based awards issued and assumed, net of shares withheld for employee taxes1 — 52 — — — 52 
Common stock repurchased(1)(220)— — — — (220)
Stock-based compensation— — 361 — — — 361 
Balances at June 30, 20201,173 $(7,892)$15,914 $(170)$9,788 $44 $17,684 
Net income— — — — 1,021 — 1,021 
Foreign CTA— — — 8 — — 8 
Unrealized losses on cash flow hedges, net— — — (163)— — (163)
Tax benefit on unrealized losses on cash flow hedges, net— — — 2 — — 2 
Unrealized losses on investments, net— — — (12)— — (12)
Tax benefit on unrealized gains on investments, net— — — 3 — — 3 
Common stock and stock-based awards issued and assumed, net of shares withheld for employee taxes1 — (41)— — — (41)
Common stock repurchased(2)(350)— — — — (350)
Stock-based compensation— — 375 — — — 375 
Balances at September 30, 20201,172 $(8,242)$16,248 $(332)$10,809 $44 $18,527 
7
PayPal Holdings, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (continued)
Common Stock SharesTreasury StockAdditional Paid-In CapitalAccumulated Other
Comprehensive Income (Loss)		Retained EarningsNoncontrolling InterestTotal 
Equity
 (In millions)
(Unaudited)
Balances at December 31, 20181,174 $(5,511)$14,939 $78 $5,880 $— $15,386 
Adoption of lease accounting standard— — — — 3 — 3 
Net income— — — — 667 — 667 
Foreign CTA— — — (67)— — (67)
Unrealized losses on cash flow hedges, net— — — (46)— — (46)
Tax benefit on unrealized losses on cash flow hedges, net— — — 1 — — 1 
Unrealized gains on investments, net— — — 11 — — 11 
Tax expense on unrealized gains on investments, net— — — (2)— — (2)
Common stock and stock-based awards issued and assumed, net of shares withheld for employee taxes6 — (302)— — — (302)
Common stock repurchased(8)(705)(45)— — — (750)
Stock-based compensation— — 256 — — — 256 
Balances at March 31, 20191,172 $(6,216)$14,848 $(25)$6,550 $— $15,157 
Net income— — — — 823 — 823 
Foreign CTA— — — 9 — — 9 
Unrealized losses on cash flow hedges, net— — — (18)— — (18)
Tax benefit on unrealized losses on cash flow hedges, net— — — — — — — 
Unrealized gains on investments, net— — — 10 — — 10 
Tax expense on unrealized gains on investments, net— — — (4)— — (4)
Common stock and stock-based awards issued and assumed, net of shares withheld for employee taxes5 — (73)— — — (73)
Stock-based compensation— — 235 — — — 235 
Balances at June 30, 20191,177 $(6,216)$15,010 $(28)$7,373 $— $16,139 
Net income— — — — 462 462 
Foreign CTA— — — (90)— — (90)
Unrealized gains on cash flow hedges, net— — — 71 — — 71 
Tax expense on unrealized gains on cash flow hedges, net— — — (1)— — (1)
Unrealized losses on investments, net— — — (5)— — (5)
Tax benefit on unrealized losses on investments, net— — — 1 — — 1 
Common stock and stock-based awards issued and assumed, net of shares withheld for employee taxes— — (19)— — — (19)
Common stock repurchased(3)(350)— — — — (350)
Stock-based compensation— — 275 — — — 275 
Balances at September 30, 20191,174 $(6,566)$15,266 $(52)$7,835 $— $16,483 
The accompanying notes are an integral part of these condensed consolidated financial statements.

8
PayPal Holdings, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 Nine Months Ended September 30,
 20202019
 (In millions)
(Unaudited)
Cash flows from operating activities:
Net income$2,635 $1,952 
Adjustments:
Transaction and credit losses1,375 999 
Depreciation and amortization888 685 
Stock-based compensation999 736 
Deferred income taxes(6)(122)
Gains on strategic investments(973)(170)
Other 10 (130)
Changes in assets and liabilities:
Accounts receivable7 (103)
Changes in loans and interest receivable held for sale, net— 4 
Accounts payable(93)(51)
Income taxes payable(115)(33)
Other assets and liabilities (120)(470)
Net cash provided by operating activities4,607 3,297 
Cash flows from investing activities:
Purchases of property and equipment(640)(530)
Proceeds from sales of property and equipment120 17 
Changes in principal loans receivable, net523 (1,111)
Purchases of investments(28,333)(19,808)
Maturities and sales of investments19,733 17,390 
Acquisitions, net of cash and restricted cash acquired(3,609)— 
Funds receivable(1,060)(1,292)
Net cash used in investing activities(13,266)(5,334)
Cash flows from financing activities:
Proceeds from issuance of common stock72 78 
Purchases of treasury stock(1,370)(1,106)
Tax withholdings related to net share settlements of equity awards(463)(473)
Borrowings under financing arrangements6,966 5,471 
Repayments under financing arrangements(3,000)(2,509)
Funds payable and amounts due to customers7,822 2,376 
Other financing activities(15)— 
Net cash provided by financing activities10,012 3,837 
Effect of exchange rate changes on cash, cash equivalents, and restricted cash 26 (49)
Net change in cash, cash equivalents, and restricted cash 1,379 1,751 
Cash, cash equivalents, and restricted cash at beginning of period 15,743 13,233 
Cash, cash equivalents, and restricted cash at end of period$17,122 $14,984 
Supplemental cash flow disclosures:
Cash paid for interest$91 $76 
Cash paid for income taxes, net$444 $220 
The below table reconciles cash, cash equivalents, and restricted cash as reported in the condensed consolidated balance sheets to the total of the same amounts shown in the condensed consolidated statements of cash flows:
Cash and cash equivalents$6,112 $6,877 
Short term investments23 10 
Funds receivable and customer accounts10,987 8,097 
Total cash, cash equivalents, and restricted cash shown in the condensed consolidated statements of cash flows$17,122 $14,984 
The accompanying notes are an integral part of these condensed consolidated financial statements.
9
PayPal Holdings, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Note 1—Overview and Summary of Significant Accounting Policies

Overview and Organization

PayPal Holdings, Inc. (“PayPal,” the “Company,” “we,” “us,” or “our”) was incorporated in Delaware in January 2015 and is a leading technology platform and digital payments company that enables digital and mobile payments on behalf of merchants and consumers worldwide. PayPal is committed to democratizing financial services and empowering people and businesses to join and thrive in the global economy. Our goal is to enable our merchants and consumers to manage and move their money anywhere in the world, anytime, on any platform, and using any device. We also facilitate person-to-person payments through our PayPal, Venmo, and Xoom products and services and simplify and personalize shopping experiences for our consumers through our Honey Platform. Our combined payment solutions, including our core PayPal, PayPal Credit, Braintree, Venmo, Xoom, iZettle, and Hyperwallet products and services, comprise our proprietary Payments Platform.

We operate globally and in a rapidly evolving regulatory environment characterized by a heightened regulatory focus on all aspects of the payments industry. That focus continues to become even more heightened as regulators on a global basis focus on important issues such as countering terrorist financing, anti-money laundering, privacy, cybersecurity, and consumer protection. Some of the laws and regulations to which we are subject were enacted recently, and the laws and regulations applicable to us, including those enacted prior to the advent of digital and mobile payments, are continuing to evolve through legislative and regulatory action and judicial interpretation. New or changing laws and regulations, including the way laws and regulations are interpreted and implemented, as well as increased penalties and enforcement actions related to non-compliance, could have a material adverse impact on our business, results of operations, and financial condition. Therefore, we monitor these areas closely to design compliant solutions for our customers who depend on us.

Significant Accounting Policies

Basis of Presentation and Principles of Consolidation
The condensed consolidated financial statements include the financial statements of PayPal and our wholly- and majority-owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation. Noncontrolling interest reported as a component of equity on our condensed consolidated balance sheets represents the equity interests not owned by PayPal and is recorded for consolidated entities we control and of which we own less than 100%. Noncontrolling interest is not presented separately on our condensed consolidated statements of income as the amount is de minimis.
Investments in entities where we have the ability to exercise significant influence, but not control, over the investee are accounted for using the equity method of accounting. For such investments, our share of the investee’s results of operations is included in other income (expense), net on our condensed consolidated statements of income and our investment balance is included in long-term investments on our condensed consolidated balance sheets. Investments in entities where we do not have the ability to exercise significant influence over the investee are accounted for at fair value or cost minus impairment, if any, adjusted for changes resulting from observable price changes, which are included in other income (expense), net on our condensed consolidated statements of income. Our investment balance is included in long-term investments on our condensed consolidated balance sheets.
We determine at the inception of each arrangement whether an entity in which we have made an investment is considered a variable interest entity (“VIE”). If we determine it is, we then assess if we are the primary beneficiary, which would require consolidation. As of September 30, 2020, we held an investment in a VIE which did not qualify for consolidation as we are not the primary beneficiary. The investment balance is de minimis and included as a non-marketable equity security in long-term investments on our condensed consolidated balance sheets.

These condensed consolidated financial statements and accompanying notes should be read in conjunction with the audited consolidated financial statements and accompanying notes included in our Annual Report on Form 10-K for the year ended December 31, 2019 (the “2019 Form 10-K”) filed with the Securities and Exchange Commission on February 6, 2020.
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PayPal Holdings, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
In the opinion of management, these condensed consolidated financial statements reflect all adjustments, consisting only of normal recurring adjustments, which are necessary for a fair statement of the condensed consolidated financial statements for interim periods. Certain amounts for prior years have been reclassified to conform to the financial statement presentation as of and for the three and nine months ended September 30, 2020.

Use of Estimates

The preparation of condensed consolidated financial statements in conformity with U.S. generally accepted accounting principles (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. On an ongoing basis, we evaluate our estimates, including those related to provisions for transaction and credit losses, loss contingencies, income taxes, revenue recognition, and the valuation of goodwill and intangible assets. We base our estimates on historical experience and various other assumptions which we believe to be reasonable under the circumstances. These estimates may change as new events occur, and as additional information surrounding the impact of the novel coronavirus (“COVID-19”) pandemic is obtained. Actual results could differ from these estimates and any such differences may be material to our financial statements.

Investments

Short-term investments include time deposits, money market funds, government and agency securities, and corporate debt securities with original maturities of greater than three months but less than one year when purchased or maturities of less than one year on the reporting date. Long-term investments include time deposits, government and agency securities and corporate debt securities with maturities exceeding one year, and our strategic investments. Government and agency securities and corporate debt securities are classified as available-for-sale and are reported at fair value using the specific identification method. Unrealized gains and losses are reported as a component of other comprehensive income (loss), net of related estimated tax provisions or benefits. Accrued interest receivable on available-for-sale debt securities totaled $31 million and $54 million at September 30, 2020 and December 31, 2019, respectively, and is included in other current assets on our condensed consolidated balance sheets.

We elect to account for foreign currency denominated available-for-sale investments underlying funds receivable and customer accounts, short-term investments, and long-term investments under the fair value option as further discussed in “Note 9—Fair Value Measurement of Assets and Liabilities.” The changes in fair value related to initial measurement and subsequent changes in fair value are included in earnings as a component of other income (expense), net.

Our strategic investments consist of marketable equity securities, which are publicly traded, and non-marketable equity securities, which are investments in privately held companies. Marketable equity securities have readily determinable fair values with changes in fair value recorded in other income (expense), net. Non-marketable equity securities include investments that do not have a readily determinable fair value and equity method investments. The investments that do not have readily determinable fair value are measured at cost minus impairment, if any, adjusted for changes resulting from observable price changes in orderly transactions for an identical or similar investment in the same issuer (the “Measurement Alternative”). All gains and losses on these investments, realized and unrealized, are recorded in other income (expense), net on our condensed consolidated statements of income. Our investments where we have the ability to exercise significant influence, but not control, over the investee are accounted for as equity method investments and our share of the investee’s results of operations is included in other income (expense), net.

We assess whether an impairment loss on our non-marketable equity securities and an other-than-temporary impairment loss on our equity method investments has occurred due to declines in fair value or other market conditions. If any impairment is identified for non-marketable equity securities or impairment is considered other-than-temporary for our equity method investments, we write down the investment to its fair value and record the corresponding charge through other income (expense), net in our condensed consolidated statements of income.

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PayPal Holdings, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Our available-for-sale debt securities in an unrealized loss position will be written down to fair value through a charge to other income (expense), net in our condensed consolidated statements of income if we intend to sell the security or it is more likely than not we will be required to sell the security before recovery of its amortized cost basis. For the remaining available-for-sale debt securities in an unrealized loss position, if we identify that the decline in fair value has resulted from credit losses, taking into consideration changes to the rating of the security by rating agencies, implied yields versus benchmark yields, and the extent to which fair value is less than amortized cost, among other factors, we will estimate the present value of cash flows expected to be collected. If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an allowance for credit losses is recorded, limited by the amount that the fair value is less than the amortized cost basis. Any impairment that has not been recorded through an allowance for credit losses is recognized in other comprehensive income.

Loans and Interest Receivable, Net

Loans and interest receivable, net represents merchant receivables originated under our PayPal Working Capital (“PPWC”) product and PayPal Business Loan (“PPBL”) product and international consumer loans originated under our PayPal Credit products. In the U.S., we partner with an independent chartered financial institution that extends credit to merchants using our PPWC product or PPBL product and purchase the related receivables extended by the independent chartered financial institution.

For our international consumer credit products, we extend credit through our Luxembourg banking subsidiary. For our merchant credit products outside the U.S., we extend working capital advances in the U.K. and loans in Germany through our Luxembourg banking subsidiary, and we extend working capital loans in Australia through an Australian subsidiary.

As part of our arrangement with the independent chartered financial institution in the U.S., we sell back a participation interest in the pool of merchant receivables. For this arrangement, gains or losses on the sale of the participation interests are not material as the carrying amount of the participation interest sold approximates the fair value at time of transfer. The independent chartered financial institution has no recourse against us related to their participation interests for failure of debtors to pay when due. The participation interests held by the chartered financial institution have the same priority to the interests held by us and are subject to the same credit, prepayment, and interest rate risk associated with this pool of merchant receivables. All risks of loss are shared pro rata based on participation interests held among all participating stakeholders. We apply a control-oriented, financial-components approach, and account for the asset transfer as a sale and derecognize the portion of the participation interests for which control has been surrendered.

Loans, advances, and interest and fees receivable are reported at their outstanding balances, net of any participation interests sold and pro rata allowances, including unamortized deferred origination costs and estimated collectible interest and fees. We maintain the servicing rights for the entire pool of consumer and merchant receivables outstanding and receive a fee approximating the fair value for servicing the assets underlying the participation interest sold.

We offer both revolving and installment credit products to our international consumers. The terms of our consumer relationships require us to submit monthly bills to the consumer detailing loan repayment requirements. The terms also allow us to charge the consumer interest and fees in certain circumstances. Due to the relatively small dollar amount of individual loans and interest receivable, we do not require collateral on these balances.

U.S. Consumer Credit Portfolio

In November 2017, we reached an agreement to sell our U.S. consumer credit receivables portfolio to Synchrony Bank (“Synchrony”). Following the closing of this transaction in July 2018, Synchrony became the exclusive issuer of the PayPal Credit online consumer financing program in the U.S. We no longer hold an ownership interest in the receivables generated through the program and thus, no longer record these receivables on our condensed consolidated financial statements. PayPal earns a revenue share on the portfolio of consumer receivables owned by Synchrony, which includes both the sold and newly generated receivables, and it is recorded in revenue from other value added services on our condensed consolidated statements of income.

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PayPal Holdings, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Through the closing of the transaction with Synchrony, we continued to work with an independent chartered financial institution to extend credit to U.S. consumers using our PayPal Credit product. We purchased the related receivables extended by the independent chartered financial institution until July 2018. As part of the arrangements we had with the independent chartered financial institutions in the U.S., we sold back a participation interest in the pool of U.S. consumer receivables outstanding under PayPal Credit consumer accounts. For these arrangements, gains or losses on the sale of the participation interest were not material as the carrying amount of the participation interest sold approximated the fair value at time of transfer.

Allowance for Loans and Interest Receivable

The allowance for loans and interest receivable represents our estimate of lifetime expected credit losses inherent in our portfolio of loans and interest receivables. Increases to the allowance for loans receivable are reflected as a component of transaction and credit losses on our condensed consolidated statements of income. Increases to the allowance for interest and fees receivable are reflected as a reduction of net revenues on our condensed consolidated statements of income, or as a reduction of deferred revenue when interest and fees are billed at the inception of a loan or advance. The evaluation process to assess the adequacy of allowances is subject to numerous estimates and judgments.

The allowance for loans and interest receivable is primarily based on expectations of credit losses based on historical lifetime loss data as well as macroeconomic forecasts applied to the portfolio, which is segmented by geographic region, delinquency, and vintage, among other factors. Loss curves are generated using historical loss data for each loan portfolio and are applied to segments of each portfolio, categorized by geographic region, first borrowing versus reuse, delinquency, credit rating, and vintage, among other factors, which vary by portfolio. We then apply macroeconomic factors such as forecasted trends in unemployment and benchmark credit card charge-off rates, which are sourced externally, using a single scenario that is most appropriate to the economic conditions applicable to a particular period. Projected loss rates, inclusive of historical loss data and macroeconomic factors, are applied to the principal amount of our consumer and merchant receivables. We may also include qualitative adjustments that incorporate incremental information not captured in the quantitative estimates of our expected lifetime losses. Our consumer receivables are primarily revolving in nature and do not have a contractual term; however, the reasonable and supportable forecast period we have included in our projected loss rates based on externally sourced data is approximately seven years. Our merchant receivables vary in contractual term; however, the reasonable and supportable forecast period considered for projected loss rates is approximately 2.5 to 3.5 years, depending upon the product. The allowance for losses against the interest and fees receivable is determined primarily by applying loss curves to each portfolio by geography, delinquency, and period of origination, among other factors.

In connection with our agreement to sell our U.S. consumer credit receivables to Synchrony and the designation of that portfolio as held for sale in November 2017, we reversed the corresponding allowances against those loans and interest receivable balances. Such allowances on any newly originated U.S. consumer loans and interest receivables, held for sale were not established. Adjustments to the cost basis of this portfolio until the sale was completed, which were primarily driven by charge-offs, were recorded in restructuring and other charges on our condensed consolidated statements of income.

Leases

We determine whether an arrangement is a lease for accounting purposes at contract inception. Operating leases are recorded as right-of-use (“ROU”) assets, which are included in other assets, and lease liabilities, which are included in accrued expenses and other current liabilities and deferred tax liability and other long-term liabilities on our condensed consolidated balance sheets. For sale-leaseback transactions, we evaluate the sale and the lease arrangement based on our conclusion as to whether control of the underlying asset has been transferred and recognize the sale-leaseback as either a sale transaction or under the financing method. The financing method requires the asset to remain on the condensed consolidated balance sheets throughout the term of the lease and the proceeds to be recognized as a financing obligation. As of September 30, 2020, we had no finance leases.

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PayPal Holdings, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS