NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. 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 enterprise customers with infrastructure and platform services as well as communication and collaboration tools; sales of other products and services, such as apps and in-app purchases, and hardware; and fees received for subscription-based products.
Basis of Consolidation
The consolidated financial statements of Alphabet include the accounts of Alphabet and entities consolidated under the variable interest and voting models. Intercompany balances and transactions have been eliminated.
Use of Estimates
Preparation of consolidated financial statements in conformity with 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 due to uncertainties. On an ongoing basis, we evaluate our estimates, including those related to the allowance for credit losses; fair values of financial instruments, intangible assets, and goodwill; inventory; 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, and the results of which form the basis for making judgments about the carrying values of assets and liabilities.
In January 2023, we completed an assessment of the useful lives of our servers and network equipment and adjusted the estimated useful life of our servers from four years to six years and the estimated useful life of certain network equipment from five years to six years. This change in accounting estimate is effective beginning in fiscal year 2023.
Stock Split Effected in the Form of a Stock Dividend (“Stock Split”)
On February 1, 2022, the company announced that the Board of Directors had approved and declared a 20-for-one stock split in the form of a one-time special stock dividend on each share of the company’s Class A, Class B, and Class C stock. The Stock Split had a record date of July 1, 2022 and an effective date of July 15, 2022. The par value per share of our Class A, Class B, and Class C stock remains unchanged at $0.001 per share after the Stock Split. All prior period references made to share or per share amounts in the accompanying consolidated financial statements and applicable disclosures prior to the effective date have been retroactively adjusted to reflect the effects of the Stock Split.
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 and other properties, including revenues from traffic generated by search distribution partners who use Google.com as their default search in browsers, toolbars, etc. and other Google owned and operated properties like Gmail, Google Maps, and Google Play;
•YouTube properties; and
•Google Network properties, including revenues from Google Network properties participating in AdMob, AdSense, and Google Ad Manager.
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 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 properties on a gross basis, that is, the amounts billed to our customers are recorded as revenues, and amounts paid to Google Network partners 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 of revenues from:
•Google Cloud Platform, which includes fees for infrastructure, platform, and other services;
•Google Workspace, which includes fees for cloud-based communication and collaboration tools for enterprises, such as Gmail, Docs, Drive, Calendar, and Meet; and
•other enterprise services.
Our cloud services are generally provided on either a consumption or subscription basis and may have contract terms longer than a year. 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.
Google Other Revenues
Google other revenues consist of revenues from:
•Google Play, which includes sales of apps and in-app purchases;
•hardware, which includes sales of Fitbit wearable devices, Google Nest home products, and Pixel devices;
•YouTube non-advertising, which includes subscription revenues from services such as YouTube Premium and YouTube TV; and
•other products and services.
We report revenues from Google Play app sales and in-app purchases on a net basis, because our performance obligation is to facilitate a transaction between app developers and end users, for which we earn a service fee.
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.
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 (the period of the expected benefit) 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 recognize the expense over the amortization period. These costs are recorded within sales and marketing expenses.
Cost of Revenues
Cost of revenues consists of TAC and other costs of revenues.
•TAC includes:
◦Amounts paid to our distribution partners who make available our search access points and services. Our distribution partners include browser providers, mobile carriers, original equipment manufacturers, and software developers.
◦Amounts paid to Google Network partners primarily for ads displayed on their properties.
•Other cost of revenues includes:
◦Content acquisition costs, which are payments to content providers from whom we license video and other content for distribution on YouTube and Google Play (we pay fees to these content providers based on revenues generated or a flat fee).
◦Expenses associated with our data centers (including bandwidth, compensation expenses, depreciation, energy, and other equipment costs) as well as other operations costs (such as content review as well as customer and product support costs).
◦Inventory and other costs related to the 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. 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 income 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 income tax withholding is recorded as a reduction to additional paid-in capital.
Additionally, stock-based compensation includes other stock-based awards, such as performance stock units (PSUs) that include market conditions 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, 2020, 2021, and 2022, advertising and promotional expenses totaled approximately $5.4 billion, $7.9 billion, and $9.2 billion, respectively.
Performance Fees
Performance fees refer to compensation arrangements with payouts based on realized returns from certain investments. We record compensation expense based on the estimated payouts on an ongoing basis, which may result in expense recognized before investment returns are realized and compensation is paid and may require the use of unobservable inputs. Performance fees are recorded as a component of other income (expense), net.
Fair Value Measurements
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. The determination of fair value involves the use of appropriate valuation methods and relevant inputs into valuation models.
Our financial assets and liabilities that are measured at fair value on a recurring basis include cash equivalents, marketable securities, derivative financial instruments, and certain non-marketable debt securities. Our financial assets measured at fair value on a nonrecurring basis include non-marketable equity securities. Other financial assets and liabilities are carried at cost with fair value disclosed, if required.
We measure certain other instruments, including stock-based compensation awards settled in the stock of certain Other Bets, and certain assets and liabilities acquired in a business combination, also at fair value on a nonrecurring basis.
Financial Instruments
Our financial instruments include cash, cash equivalents, marketable and non-marketable securities, derivative financial instruments and accounts receivable.
Credit Risks
We are subject to credit risk from cash equivalents, marketable securities, derivative financial instruments, including 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. 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 manage our credit risk exposure by performing ongoing evaluations to determine customer credit and we limit the amount of credit we extend. We generally do not require collateral from our customers.
Cash Equivalents
We invest excess cash primarily in government bonds, corporate debt securities, mortgage-backed and asset-backed securities, time deposits, and money market funds.
Marketable Securities
We classify all marketable debt securities that have effective maturities of three months or less from the date of purchase as cash equivalents and those with effective 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 effective 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, including unrealized, recognized in other income (expense), net. We classify our marketable equity securities subject
to long-term lock-up restrictions beyond twelve months as other non-current assets on the Consolidated Balance Sheets.
Non-Marketable Securities
We account for non-marketable equity securities through which we exercise significant influence but do not have control over the investee under the equity method, All other non-marketable equity securities that we hold are primarily accounted for under the measurement alternative. Under the measurement alternative, the carrying value is measured at cost, less any impairment, plus or minus changes resulting from observable price changes in orderly transactions for identical or similar investments of the same issuer. 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 securities are classified as available-for-sale securities.
Non-marketable securities that do not have effective contractual maturity dates are classified as other non-current assets on the Consolidated Balance Sheets.
Derivative Financial Instruments
See Note 3 for the accounting policy pertaining to derivative financial instruments.
Accounts Receivable
Our payment terms for accounts receivable vary by the types and locations of our customers 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. Additionally, accounts receivable includes amounts for services performed in advance of the right to invoice 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.
Other
Our financial instruments also include debt and equity investments in companies with which we also have commercial arrangements. For these transactions, judgment is required to assess the substance of the arrangements, whether the arrangements and each component of the arrangements should be accounted for as separate transactions under the applicable GAAP, as well as the determination of the value of the components of the arrangements, including the fair value of the investments.
Impairment of Investments
We periodically review our debt and non-marketable equity securities 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 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, including equity method investments, we consider whether impairment indicators exist by evaluating the companies' financial and liquidity position and access to capital resources, among other indicators. 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. We prepare quantitative measurements of the fair value of our equity investments using a market approach or an income approach.
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.
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. Construction in progress is the construction or development of property and equipment that have not yet been placed in service.
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. Land is not depreciated. We depreciate buildings over periods of seven to 25 years. We depreciate information technology assets generally over periods of four to five years (generally, four years for servers and 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. Depreciation for buildings, information technology assets, leasehold improvements, and furniture and fixtures commences once they are ready for our intended use.
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 Sheets. 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 and intangible assets, excluding goodwill, for impairment when events or changes in circumstances indicate the carrying amount may not be recoverable. The evaluation is performed at the lowest level of identifiable cash flows independent of other assets. 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 is 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 on a straight-line basis generally over periods ranging from one to twelve years, and are subsequently removed from the presentation of gross intangible assets and accumulated amortization once they are fully amortized.
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 have elected to account for the tax effects of the global intangible low tax Income provision as a current period expense.
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, except for revenue contracts acquired, which are recognized in accordance with our revenue recognition policy. 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
We translate the financial statements of our international 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 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.
Prior Period Reclassifications
Certain amounts in prior periods have been reclassified to conform with current period presentation.
Note 2. Revenues
Disaggregated Revenues
The following table presents revenues disaggregated by type (in millions):
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2020 | | 2021 | | 2022 |
Google Search & other | $ | 104,062 | | | $ | 148,951 | | | $ | 162,450 | |
YouTube ads | 19,772 | | | 28,845 | | | 29,243 | |
Google Network | 23,090 | | | 31,701 | | | 32,780 | |
Google advertising | 146,924 | | | 209,497 | | | 224,473 | |
Google other | 21,711 | | | 28,032 | | | 29,055 | |
Google Services total | 168,635 | | | 237,529 | | | 253,528 | |
Google Cloud | 13,059 | | | 19,206 | | | 26,280 | |
Other Bets | 657 | | | 753 | | | 1,068 | |
Hedging gains (losses) | 176 | | | 149 | | | 1,960 | |
Total revenues | $ | 182,527 | | | $ | 257,637 | | | $ | 282,836 | |
No individual customer or groups of affiliated customers represented more than 10% of our revenues in 2020, 2021, or 2022.
The following table presents revenues disaggregated by geography, based on the addresses of our customers (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2020 | | 2021 | | 2022 |
United States | $ | 85,014 | | | 47 | % | | $ | 117,854 | | | 46 | % | | $ | 134,814 | | | 48 | % |
EMEA(1) | 55,370 | | | 30 | | | 79,107 | | | 31 | | | 82,062 | | | 29 | |
APAC(1) | 32,550 | | | 18 | | | 46,123 | | | 18 | | | 47,024 | | | 16 | |
Other Americas(1) | 9,417 | | | 5 | | | 14,404 | | | 5 | | | 16,976 | | | 6 | |
Hedging gains (losses) | 176 | | | 0 | | | 149 | | | 0 | | | 1,960 | | | 1 | |
Total revenues | $ | 182,527 | | | 100 | % | | $ | 257,637 | | | 100 | % | | $ | 282,836 | | | 100 | % |
(1) Regions represent Europe, the Middle East, and Africa (EMEA); Asia-Pacific (APAC); and Canada and Latin America ("Other Americas").
Revenue Backlog
As of December 31, 2022, we had $64.3 billion of remaining performance obligations (“revenue backlog”), primarily related to Google Cloud. Our revenue backlog represents commitments in customer contracts for future services that have not yet been recognized as revenue. The amount and timing of revenue recognition for these commitments is largely driven by our ability to deliver in accordance with relevant contract terms and when our customers utilize services, which could affect our estimate of revenue backlog and when we expect to recognize such as revenue. We expect to recognize approximately half of the revenue backlog as revenues over the next 24 months with the remaining to be recognized thereafter. Revenue backlog includes related deferred revenue currently recorded as well as amounts that will be invoiced in future periods, and excludes contracts with an original expected term of one year or less and cancellable contracts.
Deferred Revenue
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. Total deferred revenue as of December 31, 2021 was $3.8 billion, of which $2.5 billion was recognized as revenues for the year ending December 31, 2022.
Note 3. Financial Instruments
Fair Value Measurements
Investments measured at fair value on a recurring basis
Cash, cash equivalents, and marketable equity securities are measured at fair value and classified within Level 1 and Level 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.
Debt securities are classified 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.
The following tables summarize our cash, cash equivalents, and marketable securities measured at fair value on a recurring basis (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | As of December 31, 2021 |
| | Fair Value Hierarchy | | Adjusted Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value | | Cash and Cash Equivalents | | Marketable Securities |
Fair value changes recorded in other comprehensive income | | | | | | | | | | | | | | |
Time deposits(1) | | Level 2 | | $ | 5,133 | | | $ | 0 | | | $ | 0 | | | $ | 5,133 | | | $ | 5,133 | | | $ | 0 | |
Government bonds | | Level 2 | | 53,288 | | 258 | | | (238) | | | 53,308 | | | 5 | | | 53,303 | |
Corporate debt securities | | Level 2 | | 35,605 | | 194 | | | (223) | | | 35,576 | | | 12 | | | 35,564 | |
Mortgage-backed and asset-backed securities | | Level 2 | | 18,829 | | 96 | | | (112) | | | 18,813 | | | 0 | | | 18,813 | |
Total investments with fair value change reflected in Other Comprehensive Income(2) | | | | $ | 112,855 | | | $ | 548 | | | $ | (573) | | | $ | 112,830 | | | $ | 5,150 | | | $ | 107,680 | |
Fair value adjustments recorded in net income | | | | | | | | | | | | | | |
Money market funds | | Level 1 | | | | | | | | $ | 7,499 | | | $ | 7,499 | | | $ | 0 | |
Current marketable equity securities(3) | | Level 1 | | | | | | | | 5,998 | | | 0 | | | 5,998 | |
Mutual funds | | Level 2 | | | | | | | | 351 | | | 0 | | | 351 | |
Government bonds | | Level 2 | | | | | | | | 1,165 | | | 0 | | | 1,165 | |
Corporate debt securities | | Level 2 | | | | | | | | 2,503 | | | 0 | | | 2,503 | |
Mortgage-backed and asset-backed securities | | Level 2 | | | | | | | | 1,007 | | | 0 | | | 1,007 | |
Total investments with fair value change recorded in Net Income | | | | | | | | | | $ | 18,523 | | | $ | 7,499 | | | $ | 11,024 | |
Cash | | | | | | | | | | 0 | | | 8,296 | | | 0 | |
Total | | | | $ | 112,855 | | | $ | 548 | | | $ | (573) | | | $ | 131,353 | | | $ | 20,945 | | | $ | 118,704 | |
(1)The majority of our time deposits are domestic deposits.
(2)Represents gross unrealized gains and losses for debt securities recorded to AOCI.
(3)The long-term portion of marketable equity securities (subject to long-term lock-up restrictions) of $1.4 billion as of December 31, 2021 is included within other non-current assets.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | As of December 31, 2022 |
| | Fair Value Hierarchy | | Adjusted Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value | | Cash and Cash Equivalents | | Marketable Securities |
Fair value changes recorded in other comprehensive income | | | | | | | | | | | | | | |
Time deposits(1) | | Level 2 | | $ | 5,297 | | | $ | 0 | | | $ | 0 | | | $ | 5,297 | | | $ | 5,293 | | | $ | 4 | |
Government bonds | | Level 2 | | 41,036 | | | 64 | | | (2,045) | | | 39,055 | | | 283 | | | 38,772 | |
Corporate debt securities | | Level 2 | | 28,578 | | | 8 | | | (1,569) | | | 27,017 | | | 1 | | | 27,016 | |
Mortgage-backed and asset-backed securities | | Level 2 | | 16,176 | | | 5 | | | (1,242) | | | 14,939 | | | 0 | | | 14,939 | |
Total investments with fair value change reflected in Other Comprehensive Income(2) | | | | $ | 91,087 | | | $ | 77 | | | $ | (4,856) | | | $ | 86,308 | | | $ | 5,577 | | | $ | 80,731 | |
Fair value adjustments recorded in net income | | | | | | | | | | | | | | |
Money market funds | | Level 1 | | | | | | | | $ | 7,234 | | | $ | 7,234 | | | $ | 0 | |
Current marketable equity securities(3) | | Level 1 | | | | | | | | 4,013 | | 0 | | | 4,013 |
Mutual funds | | Level 2 | | | | | | | | 339 | | 0 | | | 339 |
Government bonds | | Level 2 | | | | | | | | 1,877 | | 440 | | | 1,437 |
Corporate debt securities | | Level 2 | | | | | | | | 3,744 | | 65 | | | 3,679 |
Mortgage-backed and asset-backed securities | | Level 2 | | | | | | | | 1,686 | | 2 | | | 1,684 |
Total investments with fair value change recorded in Net Income | | | | | | | | | | $ | 18,893 | | | $ | 7,741 | | | $ | 11,152 | |
Cash | | | | | | | | | | 0 | | | 8,561 | | | 0 | |
Total | | | | $ | 91,087 | | | $ | 77 | | | $ | (4,856) | | | $ | 105,201 | | | $ | 21,879 | | | $ | 91,883 | |
(1)The majority of our time deposits are domestic deposits.
(2)Represents gross unrealized gains and losses for debt securities recorded to AOCI.
(3)The long-term portion of marketable equity securities (subject to long-term lock-up restrictions) of $803 million as of December 31, 2022 is included within other non-current assets.
Investments measured at fair value on a nonrecurring basis
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 upon observable transactions for identical or similar investments of the same issuer or impairment. 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.
During the year ended December 31, 2022, included in the $28.5 billion of non-marketable equity securities held as of the end of the period, $14.1 billion were measured at fair value and primarily classified as Level 2 investments.
Debt Securities
The following table summarizes the estimated fair value of investments in available-for-sale marketable debt securities by effective contractual maturity dates (in millions):
| | | | | |
| As of December 31, 2022 |
Due in 1 year or less | $ | 8,170 | |
Due in 1 year through 5 years | 51,698 | |
Due in 5 years through 10 years | 16,083 | |
Due after 10 years | 11,580 | |
Total | $ | 87,531 | |
The following tables present fair values and gross unrealized losses recorded to AOCI, 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, 2021 |
| Less than 12 Months | | 12 Months or Greater | | Total |
| Fair Value | | Unrealized Loss | | Fair Value | | Unrealized Loss | | Fair Value | | Unrealized Loss |
Government bonds | $ | 32,843 | | | $ | (236) | | | $ | 71 | | | $ | (2) | | | $ | 32,914 | | | $ | (238) | |
Corporate debt securities | 22,737 | | | (152) | | | 303 | | | (5) | | | 23,040 | | | (157) | |
Mortgage-backed and asset-backed securities | 11,502 | | | (106) | | | 248 | | | (6) | | | 11,750 | | | (112) | |
Total | $ | 67,082 | | | $ | (494) | | | $ | 622 | | | $ | (13) | | | $ | 67,704 | | | $ | (507) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| As of December 31, 2022 |
| Less than 12 Months | | 12 Months or Greater | | Total |
| Fair Value | | Unrealized Loss | | Fair Value | | Unrealized Loss | | Fair Value | | Unrealized Loss |
Government bonds | $ | 21,039 | | | $ | (1,004) | | | $ | 13,438 | | | $ | (1,041) | | | $ | 34,477 | | | $ | (2,045) | |
Corporate debt securities | 11,228 | | | (440) | | | 15,125 | | | (1,052) | | | 26,353 | | | (1,492) | |
Mortgage-backed and asset-backed securities | 7,725 | | | (585) | | | 6,964 | | | (657) | | | 14,689 | | | (1,242) | |
Total | $ | 39,992 | | | $ | (2,029) | | | $ | 35,527 | | | $ | (2,750) | | | $ | 75,519 | | | $ | (4,779) | |
We determine realized gains or losses on the sale or extinguishment of debt securities on a specific identification method.The following table summarizes gains and losses for debt securities, reflected as a component of other income (expense), net (in millions):
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2020 | | 2021 | | 2022 |
Unrealized gain (loss) on fair value option debt securities(1) | | $ | 86 | | | $ | (122) | | | $ | (557) | |
Gross realized gain on debt securities | | 899 | | | 432 | | | 103 | |
Gross realized loss on debt securities | | (184) | | | (329) | | | (1,588) | |
(Increase)/decrease in allowance for credit losses | | (76) | | | (91) | | | (22) | |
Total gain (loss) on debt securities recognized in other income (expense), net | | $ | 725 | | | $ | (110) | | | $ | (2,064) | |
(1)Accumulated unrealized net gains (losses) related to debt securities still held where we have elected the fair value option were $87 million, $(35) million, and $(592) million as of December 31, 2020, 2021, and 2022, respectively.
Equity Investments
The carrying value of equity securities is measured as the total initial cost plus the cumulative net gain (loss). Our share of gains and losses, including impairments, 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.
The carrying values for marketable and non-marketable equity securities are summarized below (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| As of December 31, 2021 | | As of December 31, 2022 |
| Marketable Equity Securities | | Non-Marketable Equity Securities | | Total | | Marketable Equity Securities | | Non-Marketable Equity Securities | | Total |
Total initial cost | $ | 4,211 | | | $ | 15,135 | | | $ | 19,346 | | | $ | 5,764 | | | $ | 16,157 | | | $ | 21,921 | |
Cumulative net gain (loss)(1) | 3,587 | | 12,436 | | | 16,023 | | | (608) | | | 12,372 | | | 11,764 | |
Carrying value | $ | 7,798 | | | $ | 27,571 | | | $ | 35,369 | | | $ | 5,156 | | | $ | 28,529 | | | $ | 33,685 | |
(1)Non-marketable equity securities cumulative net gain (loss) is comprised of $14.1 billion gains and $1.7 billion losses (including impairments) as of December 31, 2021 and $16.8 billion gains and $4.5 billion losses (including impairments) as of December 31, 2022.
Gains and losses on marketable and non-marketable equity securities
Gains and losses (including impairments), net, for marketable and non-marketable equity securities included in other income (expense), net are summarized below (in millions):
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2020 | | 2021 | | 2022 |
Realized net gain (loss) on equity securities sold during the period | | $ | 1,339 | | | $ | 1,196 | | | $ | (442) | |
Unrealized net gain (loss) on marketable equity securities | | 2,722 | | | 1,335 | | | (3,242) | |
Unrealized net gain (loss) on non-marketable equity securities(1) | | 1,531 | | | 9,849 | | | 229 | |
Total gain (loss) on equity securities in other income (expense), net | | $ | 5,592 | | | $ | 12,380 | | | $ | (3,455) | |
(1)Unrealized gain (loss) on non-marketable equity securities accounted for under the measurement alternative is comprised of $3.0 billion, $10.0 billion, and $3.3 billion of upward adjustments as of December 31, 2020, 2021, and 2022, respectively, and $1.5 billion, $122 million, and $3.0 billion of downward adjustments (including impairments) as of December 31, 2020, 2021, and 2022, respectively.
In the table above, realized 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 sold during the period. While these net gains (losses) may have been reflected in periods prior to the period of sale, we believe they are important supplemental information as they reflect the economic net gains (losses) on the securities sold during the period. Cumulative net gains (losses) 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, |
| 2021 | | 2022 |
Total sale price | $ | 5,604 | | | $ | 1,784 | |
Total initial cost | 1,206 | | | 937 | |
Cumulative net gains (losses)(1) | $ | 4,398 | | | $ | 847 | |
(1)Cumulative net gains excludes cumulative losses of $738 million resulting from our equity derivatives, which hedged the changes in fair value of certain marketable equity securities sold during the year ended December 31, 2021. The associated derivative liabilities arising from these losses were settled against our holdings of the underlying equity securities.
Equity securities accounted for under the equity method
As of December 31, 2021 and 2022, equity securities accounted for under the equity method had a carrying value of approximately $1.5 billion for both years. Our share of gains and losses, including impairments, 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 use derivative instruments to manage risks relating to our ongoing business operations. The primary risk managed 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 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 and present all other derivatives at gross fair values. The accounting treatment for derivatives is based on the intended use and hedge designation.
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 forward points and time value from our assessment of hedge effectiveness and amortize them on a straight-line basis over the life of the hedging instrument in revenues. The difference between fair value changes of the excluded component and the amount amortized to revenues is recorded in AOCI.
As of December 31, 2022, the net accumulated gain on our foreign currency cash flow hedges before tax effect was $171 million, which is expected to be reclassified from AOCI into revenues 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 marketable securities 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 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 forward points from the assessment of hedge effectiveness and recognize changes in the excluded component in other income (expense), net.
Other Derivatives
We enter into foreign currency forward and option contracts that are not designated as hedging instruments 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 derivatives that are not designated as accounting hedges are primarily recorded 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, commodity prices, credit exposures, and to enhance investment returns. From time to time, we enter into derivatives to hedge the market price risk on certain of our marketable equity securities. Gains and losses arising from other derivatives are primarily reflected within the “other” component of other income (expense), net. See Note 7 for further details.
The gross notional amounts of outstanding derivative instruments were as follows (in millions):
| | | | | | | | | | | |
| As of December 31, |
| 2021 | | 2022 |
| | | |
Derivatives designated as hedging instruments: | | |
Foreign exchange contracts | | | |
Cash flow hedges | $ | 16,362 | | | $ | 15,972 | |
Fair value hedges | $ | 2,556 | | | $ | 2,117 | |
Net investment hedges | $ | 10,159 | | | $ | 8,751 | |
Derivatives not designated as hedging instruments: | | |
Foreign exchange contracts | $ | 41,031 | | | $ | 34,979 | |
Other contracts | $ | 4,275 | | | $ | 7,932 | |
The fair values of outstanding derivative instruments were as follows (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | As of December 31, 2021 | | As of December 31, 2022 |
| | Assets(1) | | Liabilities(2) | | Assets(1) | | Liabilities(2) |
Derivatives designated as hedging instruments: | | | | | | | | |
Foreign exchange contracts | | $ | 867 | | | $ | 8 | | | $ | 271 | | | $ | 556 | |
| | | | | | | | |
Derivatives not designated as hedging instruments: | | | | | | | | |
Foreign exchange contracts | | 42 | | | 452 | | | 365 | | | 207 | |
Other contracts | | 52 | | | 121 | | | 40 | | | 47 | |
Total derivatives not designated as hedging instruments | | 94 | | | 573 | | | 405 | | | 254 | |
Total | | $ | 961 | | | $ | 581 | | | $ | 676 | | | $ | 810 | |
(1) Derivative assets are recorded as other current and non-current assets in the Consolidated Balance Sheets.
(2) Derivative liabilities are recorded as accrued expenses and other liabilities, current and non-current in the Consolidated Balance Sheets.
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, |
| 2020 | | 2021 | | 2022 |
Derivatives in cash flow hedging relationship: | | | | | |
Foreign exchange contracts | | | | | |
Amount included in the assessment of effectiveness | $ | 102 | | | $ | 806 | | | $ | 1,699 | |
Amount excluded from the assessment of effectiveness | (37) | | | 48 | | | (188) | |
Derivatives in net investment hedging relationship: | | | | | |
Foreign exchange contracts | | | | | |
Amount included in the assessment of effectiveness | (851) | | | 754 | | | 608 | |
Total | $ | (786) | | | $ | 1,608 | | | $ | 2,119 | |
The table below presents the gains (losses) of our derivatives on the Consolidated Statements of Income: (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Gains (Losses) Recognized in Income |
| Year Ended December 31, |
| 2020 | | 2021 | | 2022 |
| Revenues | | Other income (expense), net | | Revenues | | Other income (expense), net | | Revenues | | Other income (expense), net |
Total amounts in the Consolidated Statements of Income | $ | 182,527 | | | $ | 6,858 | | | $ | 257,637 | | | $ | 12,020 | | | $ | 282,836 | | | $ | (3,514) | |
| | | | | | | | | | | |
Effect of cash flow hedges: | | | | | | | | | | | |
Foreign exchange contracts | | | | | | | | | | | |
Amount reclassified from AOCI to income | $ | 144 | | | $ | 0 | | | $ | 165 | | | $ | 0 | | | $ | 2,046 | | | $ | 0 | |
Amount excluded from the assessment of effectiveness (amortized) | 33 | | | 0 | | | (16) | | | 0 | | | (85) | | | 0 | |
| | | | | | | | | | | |
Effect of fair value hedges: | | | | | | | | | | | |
Foreign exchange contracts | | | | | | | | | | | |
Hedged items | 0 | | | 18 | | | 0 | | | (95) | | | 0 | | | (162) | |
Derivatives designated as hedging instruments | 0 | | | (18) | | | 0 | | | 95 | | | 0 | | | 163 | |
Amount excluded from the assessment of effectiveness | 0 | | | 4 | | | 0 | | | 8 | | | 0 | | | 16 | |
Effect of net investment hedges: | | | | | | | | | | | |
Foreign exchange contracts | | | | | | | | | | | |
Amount excluded from the assessment of effectiveness | 0 | | | 151 | | | 0 | | | 82 | | | 0 | | | 171 | |
Effect of non designated hedges: | | | | | | | | | | | |
Foreign exchange contracts | 0 | | | 718 | | | 0 | | (860) | | | 0 | | | (395) | |
Other contracts | 0 | | | (906) | | | 0 | | | 101 | | | 0 | | | 144 | |
Total gains (losses) | $ | 177 | | | $ | (33) | | | $ | 149 | | | $ | (669) | | | $ | 1,961 | | | $ | (63) | |
Offsetting of Derivatives
We enter into master netting arrangements and collateral security arrangements to reduce credit risk. 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.
The gross amounts of 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):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | As of December 31, 2021 |
| | | | | | | | Gross Amounts Not Offset in the Consolidated Balance Sheets, but Have Legal Rights to Offset | | |
| | Gross Amounts Recognized | | Gross Amounts Offset in the Consolidated Balance Sheets | | Net Amounts Presented in the Consolidated Balance Sheets | | Financial Instruments(1) | | Cash and Non-Cash Collateral Received or Pledged | | Net Amounts |
Derivatives assets | | $ | 999 | | | $ | (38) | | | $ | 961 | | | $ | (434) | | | $ | (406) | | | $ | 121 | |
Derivatives liabilities | | $ | 619 | | | $ | (38) | | | $ | 581 | | | $ | (434) | | | $ | (114) | | | $ | 33 | |
| | | | | | | | | | | | |
| | As of December 31, 2022 |
| | | | | | | | Gross Amounts Not Offset in the Consolidated Balance Sheets, but Have Legal Rights to Offset | | |
| | Gross Amounts Recognized | | Gross Amounts Offset in the Consolidated Balance Sheets | | Net Amounts Presented in the Consolidated Balance Sheets | | Financial Instruments(1) | | Cash and Non-Cash Collateral Received or Pledged | | Net Amounts |
Derivatives assets | | $ | 760 | | | $ | (84) | | | $ | 676 | | | $ | (463) | | | $ | (132) | | | $ | 81 | |
Derivatives liabilities | | $ | 894 | | | $ | (84) | | | $ | 810 | | | $ | (463) | | | $ | (28) | | | $ | 319 | |
(1) The balances as of December 31, 2021 and 2022 were related to derivatives allowed to be net settled in accordance with our master netting agreements.
Note 4. Leases
We have entered into operating lease agreements primarily for data centers, land, and offices throughout the world with lease periods expiring between 2023 and 2063.
Components of operating lease expense were as follows (in millions):
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2020 | | 2021 | | 2022 |
Operating lease cost | $ | 2,267 | | | $ | 2,699 | | | $ | 2,900 | |
Variable lease cost | 619 | | | 726 | | | 838 | |
Total operating lease cost | $ | 2,886 | | | $ | 3,425 | | | $ | 3,738 | |
Supplemental information related to operating leases was as follows (in millions):
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2020 | | 2021 | | 2022 |
Cash payments for operating leases | $ | 2,004 | | | $ | 2,489 | | | $ | 2,722 | |
New operating lease assets obtained in exchange for operating lease liabilities | $ | 2,765 | | | $ | 2,951 | | | $ | 4,383 | |
| | | | | |
| | | | | |
As of December 31, 2022, our operating leases had a weighted average remaining lease term of eight years and a weighted average discount rate of 2.8%. Future lease payments under operating leases as of December 31, 2022 were as follows (in millions):
| | | | | | | |
2023 | $ | 2,955 | | | |
2024 | 2,771 | | | |
2025 | 2,377 | | | |
2026 | 1,953 | | | |
2027 | 1,502 | | | |
Thereafter | 5,882 | | | |
Total future lease payments | 17,440 | | | |
Less imputed interest | (2,462) | | | |
Total lease liability balance | $ | 14,978 | | | |
As of December 31, 2022, we have entered into leases that have not yet commenced with short-term and long-term future lease payments of $630 million and $3.1 billion that are not yet recorded on our Consolidated Balance Sheets. These leases will commence between 2023 and 2026 with non-cancelable lease terms between 1 and 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, 2021 and 2022, assets that can only be used to settle obligations of these VIEs were $6.0 billion and $4.1 billion, respectively, and the liabilities for which creditors only have recourse to the VIEs were $2.5 billion and $2.6 billion, respectively. We may continue to fund ongoing operations of certain VIEs that are included within Other Bets.
Total noncontrolling interests (NCI) in our consolidated subsidiaries were $4.3 billion and $3.8 billion as of December 31, 2021 and 2022, respectively, of which $1.1 billion is redeemable noncontrolling interest (RNCI) for both periods. 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 the "other" component of OI&E. See Note 7 for further details on OI&E.
Unconsolidated VIEs
We have investments in 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 securities or equity method investments.
The maximum exposure of these unconsolidated VIEs is 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 $2.7 billion and $2.9 billion, respectively, as of December 31, 2021 and $2.7 billion and $2.8 billion, respectively, as of December 31, 2022.
Note 6. Debt
Short-Term Debt
We have a debt financing program of up to $10.0 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, 2021 and 2022.
Our short-term debt balance also includes the current portion of certain long-term debt.
Long-Term Debt
Total outstanding debt is summarized below (in millions, except percentages):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | Effective Interest Rate | | As of December 31, |
| Maturity | | Coupon Rate | | | 2021 | | 2022 |
Debt | | | | | | | | | |
2014-2020 Notes issuances | 2024 - 2060 | | 0.45% - 3.38% | | 0.57% - 3.38% | | $ | 13,000 | | | $ | 13,000 | |
| | | | | | | | | |
Future finance lease payments, net and other (1) | | | | | | | 2,086 | | | 2,142 | |
Total debt | | | | | | | 15,086 | | | 15,142 | |
Unamortized discount and debt issuance costs | | | | | | | (156) | | | (143) | |
Less: current portion of future finance lease payments, net and other current debt(1)(2) | | | | | | | (113) | | | (298) | |
Total long-term debt | | | | | | | $ | 14,817 | | | $ | 14,701 | |
(1)Future finance lease payments are net of imputed interest.
(2)Total current portion of long-term debt is included within other accrued expenses and current liabilities. See Note 7 for further details.
The notes in the table above are 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 was approximately $12.4 billion and $9.9 billion as of December 31, 2021 and December 31, 2022, 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, 2022, the aggregate future principal payments for long-term debt, including finance lease liabilities, for each of the next five years and thereafter were as follows (in millions):
| | | | | |
2023 | $ | 221 | |
2024 | 1,156 |
2025 | 1,159 |
2026 | 2,163 |
2027 | 1,166 |
Thereafter | 9,447 |
Total | $ | 15,312 | |
Credit Facility
As of December 31, 2022, we had $10.0 billion of revolving credit facilities, $4.0 billion expiring in April 2023 and $6.0 billion expiring in April 2026. The interest rates for all credit facilities are determined based on a formula using certain market rates, as well as our progress toward the achievement of certain sustainability goals. No amounts were outstanding under the credit facilities as of December 31, 2021 and 2022.
Note 7. Supplemental Financial Statement Information
Accounts Receivable
The allowance for credit losses on accounts receivable was $550 million and $754 million as of December 31, 2021 and 2022, respectively.
Property and Equipment, Net
Property and equipment, net, consisted of the following (in millions):
| | | | | | | | | | | |
| As of December 31, |
| 2021 | | 2022 |
Land and buildings | $ | 58,881 | | | $ | 66,897 | |
Information technology assets | 55,606 | | | 66,267 | |
Construction in progress | 23,172 | | | 27,657 | |
Leasehold improvements | 9,146 | | | 10,575 | |
Furniture and fixtures | 208 | | | 314 | |
Property and equipment, gross | 147,013 | | | 171,710 | |
Less: accumulated depreciation | (49,414) | | | (59,042) | |
Property and equipment, net | $ | 97,599 | | | $ | 112,668 | |
Accrued expenses and other current liabilities
Accrued expenses and other current liabilities consisted of the following (in millions):
| | | | | | | | | | | |
| As of December 31, |
| 2021 | | 2022 |
European Commission fines(1) | $ | 9,799 | | | $ | 9,106 | |
Accrued customer liabilities | 3,505 | | | 3,619 | |
Accrued purchases of property and equipment | 2,415 | | | 3,019 | |
Current operating lease liabilities | 2,189 | | | 2,477 | |
Other accrued expenses and current liabilities | 14,136 | | | 19,645 | |
Accrued expenses and other current liabilities | $ | 32,044 | | | $ | 37,866 | |
(1) While each EC decision is under appeal, the fines are included in accrued expenses and other current liabilities on our Consolidated Balance Sheets, as we provided bank guarantees (in lieu of a cash payment) for the fines. Amounts include the effects of foreign exchange and interest. See Note 10 for further details.
Accumulated Other Comprehensive Income (Loss)
Components of AOCI, net of income 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, 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 | |
Other comprehensive income (loss) before reclassifications | (1,442) | | | (1,312) | | | 668 | | | (2,086) | |
Amounts excluded from the assessment of hedge effectiveness recorded in AOCI | 0 | | | 0 | | | 48 | | | 48 | |
Amounts reclassified from AOCI | 0 | | | (64) | | | (154) | | | (218) | |
Other comprehensive income (loss) | (1,442) | | | (1,376) | | | 562 | | | (2,256) | |
Balance as of December 31, 2021 | (2,306) | | | 236 | | | 447 | | | (1,623) | |
Other comprehensive income (loss) before reclassifications | (1,836) | | | (4,720) | | | 1,463 | | | (5,093) | |
Amounts excluded from the assessment of hedge effectiveness recorded in AOCI | 0 | | | 0 | | | (188) | | | (188) | |
Amounts reclassified from AOCI | 0 | | | 1,007 | | | (1,706) | | | (699) | |
Other comprehensive income (loss) | (1,836) | | | (3,713) | | | (431) | | | (5,980) | |
Balance as of December 31, 2022 | $ | (4,142) | | | $ | (3,477) | | | $ | 16 | | | $ | (7,603) | |
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 | 2020 | | 2021 | | 2022 | |
Unrealized gains (losses) on available-for-sale investments | | | | | | |
| | Other income (expense), net | $ | 650 | | | $ | 82 | | | $ | (1,291) | | |
| | Benefit (provision) for income taxes | (137) | | | (18) | | | 284 | | |
| | Net of income tax | 513 | | | 64 | | | (1,007) | | |
Unrealized gains (losses) on cash flow hedges | | | | | | |
Foreign exchange contracts | | Revenue | 144 | | | 165 | | | 2,046 | | |
Interest rate contracts | | Other income (expense), net | 6 | | | 6 | | | 6 | | |
| | Benefit (provision) for income taxes | (34) | | | (17) | | | (346) | | |
| | Net of income tax | 116 | | | 154 | | | 1,706 | | |
Total amount reclassified, net of income tax | $ | 629 | | | $ | 218 | | | $ | 699 | | |
Other Income (Expense), Net
Components of OI&E were as follows (in millions):
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2020 | | 2021 | | 2022 |
Interest income | $ | 1,865 | | | $ | 1,499 | | | $ | 2,174 | |
Interest expense(1) | (135) | | | (346) | | | (357) | |
Foreign currency exchange gain (loss), net | (344) | | | (240) | | | (654) | |
Gain (loss) on debt securities, net | 725 | | | (110) | | | (2,064) | |
Gain (loss) on equity securities, net | 5,592 | | | 12,380 | | | (3,455) | |
Performance fees | (609) | | | (1,908) | | | 798 | |
Income (loss) and impairment from equity method investments, net | 401 | | | 334 | | | (337) | |
Other | (637) | | | 411 | | | 381 | |
Other income (expense), net | $ | 6,858 | | | $ | 12,020 | | | $ | (3,514) | |
(1) Interest expense is net of interest capitalized of $218 million, $163 million, and $128 million for the years ended December 31, 2020, 2021, and 2022, respectively.
Note 8. Acquisitions
Mandiant Acquisition
On September 12, 2022 we closed the acquisition of Mandiant for a total purchase price of $6.1 billion, including cash and debt. The purchase price excludes post acquisition compensation arrangements. Mandiant's dynamic cyber defense, threat intelligence and incident response services are expected to enhance Google Cloud's security offerings. The financial results of Mandiant have been included within the Google Cloud segment as of the close of the acquisition.
The purchase price was allocated as follows (in millions):
| | | | | |
Intangible assets | $ | 840 | |
Goodwill(1) | 4,772 | |
Net assets acquired(2) | 489 | |
Total purchase price | $ | 6,101 | |
(1)Goodwill was recorded in the Google Cloud segment and primarily attributable to synergies expected to arise after the acquisition. Goodwill is not deductible for tax purposes.
(2)Includes $706 million of acquired cash.
Intangible assets acquired as of the acquisition date were as follows:
| | | | | | | | | | | |
| Amount (in millions) | | Weighted-Average Useful Life (in years) |
Patents and developed technology | $ | 349 | | | 4.8 |
Customer relationships | 366 | | | 8.0 |
Trade names and other | 125 | | | 5.9 |
Total intangible assets | $ | 840 | | | |
Note 9. Goodwill and Other Intangible Assets
Goodwill
Changes in the carrying amount of goodwill for the years ended December 31, 2021 and 2022 were as follows (in millions):
| | | | | | | | | | | | | | | | | | | | | | | |
| Google Services | | Google Cloud | | Other Bets | | Total |
Balance as of December 31, 2020 | $ | 18,517 | | | $ | 1,957 | | | $ | 701 | | | $ | 21,175 | |
Acquisitions | 1,325 | | | 382 | | | 103 | | | 1,810 | |
Foreign currency translation and other adjustments | (16) | | | (2) | | | (11) | | | (29) | |
Balance as of December 31, 2021 | 19,826 | | | 2,337 | | | 793 | | | 22,956 | |
Acquisitions | 1,176 | | | 4,876 | | | 119 | | | 6,171 | |
Foreign currency translation and other adjustments | (155) | | | (8) | | | (4) | | | (167) | |
Balance as of December 31, 2022 | $ | 20,847 | | | $ | 7,205 | | | $ | 908 | | | $ | 28,960 | |
Other Intangible Assets
Information regarding intangible assets was as follows (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| As of December 31, 2021 | | As of December 31, 2022 |
| Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount | | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Value | | Weighted-Average Remaining Useful Life (in years) |
Patents and developed technology | $ | 4,786 | | | $ | 4,112 | | | $ | 674 | | | $ | 1,164 | | | $ | 354 | | | $ | 810 | | | 3.2 |
Customer relationships | 506 | | | 140 | | | 366 | | | 862 | | | 235 | | | 627 | | | 5.0 |
Trade names and other | 534 | | | 295 | | | 239 | | | 527 | | | 120 | | | 407 | | | 6.3 |
Total definite-lived intangible assets | 5,826 | | | 4,547 | | | 1,279 | | | 2,553 | | | 709 | | | 1,844 | | | |
Indefinite-lived intangible assets | 138 | | | 0 | | | 138 | | | 240 | | | 0 | | | 240 | | | |
Total intangible assets | $ | 5,964 | | | $ | 4,547 | | | $ | 1,417 | | | $ | 2,793 | | | $ | 709 | | | $ | 2,084 | | | |
For the year ended December 31, 2022, $4.5 billion of intangible assets that were fully amortized have been removed from gross intangible assets and accumulated amortization.
Amortization expense relating to intangible assets was $774 million, $875 million, and $642 million for the years ended December 31, 2020, 2021, and 2022, respectively.
Expected amortization expense of definite-lived intangible assets held as of December 31, 2022 was as follows (in millions):
| | | | | |
2023 | $ | 463 | |
2024 | 444 | |
2025 | 314 | |
2026 | 235 | |
2027 | 152 | |
Thereafter | 236 | |
| $ | 1,844 | |
Note 10. Commitments and contingencies
Commitments
We have content licensing agreements with future fixed or minimum guaranteed commitments of $12.3 billion as of December 31, 2022, of which the majority will be paid over seven years commencing in 2023.
Indemnifications
In the normal course of business, including to facilitate transactions in our services and products and corporate activities, we indemnify certain parties, including advertisers, Google Network partners, distribution partners, customers of Google Cloud offerings, lessors, and service providers 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, 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, 2022, we did not have any material indemnification claims that were probable or reasonably possible.
Legal Matters
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.
Certain outstanding matters include speculative, substantial or indeterminate monetary amounts. Significant judgment is required to determine both the likelihood of there being a loss and the estimated amount of a loss related to such matters, and we may be unable to estimate the reasonably possible loss or range of losses. The outcomes of outstanding legal matters are inherently unpredictable and subject to significant uncertainties, and could, either individually or in aggregate, have a material adverse effect.
We expense legal fees in the period in which they are incurred.
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 to the General Court, 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 November 10, 2021, the General Court rejected our appeal, and we subsequently filed an appeal with the European Court of Justice on January 20, 2022.
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, and on October 29, 2018, we implemented changes to certain of our Android distribution practices. On September 14, 2022, the General Court reduced the fine from €4.3 billion to €4.1 billion. We subsequently filed an appeal with the European Court of Justice. In 2018, we recognized a charge of $5.1 billion for the fine, which we reduced by $217 million in 2022.
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, which remains pending. We recognized a charge of $1.7 billion for the fine in the first quarter of 2019.
From time to time we are subject to formal and informal inquiries and investigations on various competition matters by regulatory authorities in the U.S., Europe, and other jurisdictions globally. 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. Further, in June 2022, the Australian Competition and Consumer Commission (ACCC) and the United Kingdom's Competition and Markets Authority (CMA) each opened an investigation into Search distribution practices.
•On December 16, 2020, a number of state Attorneys General filed an antitrust complaint in the U.S. 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. Additionally, on January 24, 2023, the DOJ, along with a number of state Attorneys General, filed an antitrust complaint alleging that Google’s digital advertising technology products violate U.S. antitrust laws. The EC, the CMA, and the ACCC each opened a formal investigation into Google's advertising technology business practices on June 22, 2021, May 25, 2022, and June 29, 2022, respectively.
•On July 7, 2021, a number of state Attorneys General filed an antitrust complaint in the U.S. District Court for the Northern District of California, alleging that Google’s operation of Android and Google Play violated U.S. antitrust laws and state antitrust and consumer protection laws. In May 2022, the EC and the CMA each opened investigations into Google Play’s business practices. Korean regulators are investigating Google Play's billing practices, most recently opening a formal review in May 2022 of Google's compliance with the new app store billing regulations.
We believe these complaints are without merit and will defend ourselves vigorously. We continue to cooperate with federal and state regulators in the U.S., the EC, 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.
Other
We are subject to claims, lawsuits, regulatory and government investigations, other proceedings, and consent orders involving competition, intellectual property, data privacy and security, 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. For example, we currently have a number of privacy investigations and lawsuits ongoing in multiple jurisdictions. We also periodically have data incidents that we report to relevant regulators as required by law. Such claims, lawsuits, regulatory and government investigations, other proceedings, and consent orders could result in substantial fines and penalties, injunctive relief, ongoing monitoring and auditing 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.
We have ongoing legal matters relating to Russia. For example, civil judgments that include compounding penalties have been imposed upon us in connection with disputes regarding the termination of accounts, including those of sanctioned parties. We do not believe these ongoing legal matters will have a material adverse effect.
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
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.
Stock Split
On July 15, 2022, the company executed a 20-for-one stock split with a record date of July 1, 2022, effected in the form of a one-time special stock dividend on each share of the company's Class A, Class B, and Class C stock. All prior period references made to share or per share amounts in the accompanying consolidated financial statements and applicable disclosures have been retroactively adjusted to reflect the effects of the Stock Split. See Note 1 for further details.
Share Repurchases
In April 2022, the Board of Directors of Alphabet authorized the company to repurchase up to $70.0 billion of its Class A and Class C shares. As of December 31, 2022, $28.1 billion remains available for Class A and Class C share repurchases.
The following table presents Class A and Class C shares repurchased and subsequently retired (in millions):
| | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, 2021 | | Year Ended December 31, 2022 |
| Shares | | Amount | | Shares | | Amount |
Class A share repurchases | 24 | | $ | 3,399 | | | 61 | | $ | 6,719 | |
Class C share repurchases | 383 | | 46,875 | | | 469 | | 52,577 | |
Total share repurchases | 407 | | $ | 50,274 | | | 530 | | $ | 59,296 | |
Class A and Class C shares are repurchased in a manner deemed in the best interest of the company and its stockholders, taking into account the economic cost and prevailing market conditions, including the relative trading prices and volumes of the Class A and Class C shares. Repurchases are 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.
Note 12. Net Income Per Share
We compute net income per share of Class A, Class B, and Class C 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 stock assumes the conversion of Class B stock, while the diluted net income per share of Class B stock does not assume the conversion of those shares.
The rights, including the liquidation and dividend rights, of the holders of our Class A, Class B, and Class C 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, Class B, and Class C 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, Class B, and Class C 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, 2020, 2021, and 2022, the net income per share amounts are the same for Class A, Class B, and Class C 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, Class B, and Class C stock (in millions, except per share amounts):
| | | | | | | | | | | | | | | | | |
| 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 | 5,996 | | | 924 | | | 6,696 | |
| | | | | |
| | | | | |
| | | | | |
Basic net income per share | $ | 2.96 | | | $ | 2.96 | | | $ | 2.96 | |
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 | 5,996 | | | 924 | | | 6,696 | |
Weighted-average effect of dilutive securities | | | | | |
Add: | | | | | |
Conversion of Class B to Class A shares outstanding | 924 | | | 0 | | | 0 | |
| | | | | |
Restricted stock units and other contingently issuable shares | 2 | | | 0 | | | 123 | |
Number of shares used in per share computation | 6,922 | | | 924 | | | 6,819 | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
Diluted net income per share | $ | 2.93 | | | $ | 2.93 | | | $ | 2.93 | |
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2021 |
| Class A | | Class B | | Class C |
Basic net income per share: | | | | | |
Numerator | | | | | |
| | | | | |
| | | | | |
| | | | | |
Allocation of undistributed earnings | $ | 34,200 | | | $ | 5,174 | | | $ | 36,659 | |
Denominator | | | | | |
Number of shares used in per share computation | 6,006 | | | 909 | | | 6,438 | |
| | | | | |
| | | | | |
| | | | | |
Basic net income per share | $ | 5.69 | | | $ | 5.69 | | | $ | 5.69 | |
Diluted net income per share: | | | | | |
Numerator | | | | | |
Allocation of undistributed earnings for basic computation | $ | 34,200 | | | $ | 5,174 | | | $ | 36,659 | |
Reallocation of undistributed earnings as a result of conversion of Class B to Class A shares | 5,174 | | | 0 | | | 0 | |
Reallocation of undistributed earnings | (581) | | | (77) | | | 581 | |
Allocation of undistributed earnings | $ | 38,793 | | | $ | 5,097 | | | $ | 37,240 | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
Denominator | | | | | |
Number of shares used in basic computation | 6,006 | | | 909 | | | 6,438 | |
Weighted-average effect of dilutive securities | | | | | |
Add: | | | | | |
Conversion of Class B to Class A shares outstanding | 909 | | | 0 | | | 0 | |
| | | | | |
Restricted stock units and other contingently issuable shares | 0 | | | 0 | | | 200 | |
Number of shares used in per share computation | 6,915 | | | 909 | | | 6,638 | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
Diluted net income per share | $ | 5.61 | | | $ | 5.61 | | | $ | 5.61 | |
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2022 |
| Class A | | Class B | | Class C |
Basic net income per share: | | | | | |
Numerator | | | | | |
Allocation of undistributed earnings | $ | 27,518 | | | $ | 4,072 | | | $ | 28,382 | |
Denominator | | | | | |
Number of shares used in per share computation | 5,994 | | | 887 | | | 6,182 | |
| | | | | |
| | | | | |
| | | | | |
Basic net income per share | $ | 4.59 | | | $ | 4.59 | | | $ | 4.59 | |
Diluted net income per share: | | | | | |
Numerator | | | | | |
| | | | | |
Allocation of undistributed earnings for basic computation | $ | 27,518 | | | $ | 4,072 | | | $ | 28,382 | |
| | | | | |
| | | | | |
Reallocation of undistributed earnings as a result of conversion of Class B to Class A shares | 4,072 | | | 0 | | | 0 | |
Reallocation of undistributed earnings | (230) | | | (30) | | | 230 | |
Allocation of undistributed earnings | $ | 31,360 | | | $ | 4,042 | | | $ | 28,612 | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
Denominator | | | | | |
Number of shares used in basic computation | 5,994 | | | 887 | | | 6,182 | |
Weighted-average effect of dilutive securities | | | | | |
Add: | | | | | |
Conversion of Class B to Class A shares outstanding | 887 | | | 0 | | | 0 | |
| | | | | |
Restricted stock units and other contingently issuable shares | 0 | | | 0 | | | 96 | |
Number of shares used in per share computation | 6,881 | | | 887 | | | 6,278 | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
Diluted net income per share | $ | 4.56 | | | $ | 4.56 | | | $ | 4.56 | |
Note 13. Compensation Plans
Stock Plans
Our stock plans include the Alphabet Amended and Restated 2021 Stock Plan ("Alphabet 2021 Stock Plan") and Other Bet stock-based plans. Under our stock plans, RSUs and other types of awards may be granted. Under the Alphabet 2021 Stock Plan, an RSU award is an agreement to issue shares of our Class C stock at the time the award vests. RSUs generally vest over four years contingent upon employment on the vesting date.
As of December 31, 2022, there were 706 million shares of Class C stock reserved for future issuance under the Alphabet 2021 Stock Plan.
Stock-Based Compensation
For the years ended December 31, 2020, 2021, and 2022, total stock-based compensation expense was $13.4 billion, $15.7 billion, and $19.5 billion, including amounts associated with awards we expect to settle in Alphabet stock of $12.8 billion, $15.0 billion, and $18.8 billion, respectively.
For the years ended December 31, 2020, 2021, and 2022, 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 $2.7 billion, $3.1 billion, and $3.9 billion, respectively.
For the years ended December 31, 2020, 2021, and 2022, tax benefit realized related to awards vested or exercised during the period was $3.6 billion, $5.9 billion, and $4.7 billion, respectively. These amounts do not include the indirect effects of stock-based awards, which primarily relate to the R&D tax credit.
Stock-Based Award Activities
The following table summarizes the activities for unvested Alphabet RSUs for the year ended December 31, 2022 (in millions, except per share amounts):
| | | | | | | | | | | |
| Unvested Restricted Stock Units |
| Number of Shares | | Weighted- Average Grant-Date Fair Value |
Unvested as of December 31, 2021 | 338 | | | $ | 81.31 | |
Granted | 227 | | | $ | 127.22 | |
Vested | (213) | | | $ | 87.53 | |
Forfeited/canceled | (28) | | | $ | 97.10 | |
Unvested as of December 31, 2022 | 324 | | | $ | 107.98 | |
The weighted-average grant-date fair value of RSUs granted during the years ended December 31, 2020 and 2021 was $70.40 and $97.46, respectively. Total fair value of RSUs, as of their respective vesting dates, during the years ended December 31, 2020, 2021, and 2022, were $17.8 billion, $28.8 billion, and $23.9 billion, respectively.
As of December 31, 2022, there was $32.8 billion of unrecognized compensation cost related to unvested RSUs. This amount is expected to be recognized over a weighted-average period of 2.6 years.
Note 14. Income Taxes
Income from continuing operations before income taxes consisted of the following (in millions): | | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2020 | | 2021 | | 2022 |
Domestic operations | $ | 37,576 | | | $ | 77,016 | | | $ | 61,307 | |
Foreign operations | 10,506 | | | 13,718 | | | 10,021 | |
Total | $ | 48,082 | | | $ | 90,734 | | | $ | 71,328 | |
Provision for income taxes consisted of the following (in millions): | | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2020 | | 2021 | | 2022 |
Current: | | | | | |
Federal and state | $ | 4,789 | | | $ | 10,126 | | | $ | 17,120 | |
| | | | | |
Foreign | 1,687 | | | 2,692 | | | 2,434 | |
Total | 6,476 | | | 12,818 | | | 19,554 | |
Deferred: | | | | | |
Federal and state | 1,552 | | | 2,018 | | | (8,052) | |
| | | | | |
Foreign | (215) | | | (135) | | | (146) | |
Total | 1,337 | | | 1,883 | | | (8,198) | |
Provision for income taxes | $ | 7,813 | | | $ | 14,701 | | | $ | 11,356 | |
The reconciliation of federal statutory income tax rate to our effective income tax rate was as follows:
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2020 | | 2021 | | 2022 |
U.S. federal statutory tax rate | 21.0 | % | | 21.0 | % | | 21.0 | % |
Foreign income taxed at different rates | (0.3) | | | 0.2 | | | 3.0 | |
Foreign-derived intangible income deduction | (3.0) | | | (2.5) | | | (5.4) | |
Stock-based compensation expense | (1.7) | | | (2.5) | | | (1.2) | |
Federal research credit | (2.3) | | | (1.6) | | | (2.2) | |
Deferred tax asset valuation allowance | 1.4 | | | 0.6 | | | 0.9 | |
State and local income taxes | 1.1 | | | 1.0 | | | 0.8 | |
Other | 0.0 | | | 0.0 | | | (1.0) | |
Effective tax rate | 16.2 | % | | 16.2 | % | | 15.9 | % |
In 2022, there was an increase in the U.S. Foreign Derived Intangible Income tax deduction from the effects of capitalization and amortization of R&D expenses in 2022 as required by the 2017 Tax Cuts and Jobs Act.
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 were as follows (in millions):
| | | | | | | | | | | |
| As of December 31, |
| 2021 | | 2022 |
Deferred tax assets: | | | |
| | | |
| | | |
| | | |
Accruals and reserves not currently deductible | $ | 1,816 | | | $ | 1,956 | |
| | | |
Tax credits | 5,179 | | | 6,002 | |
Net operating losses | 1,790 | | | 2,557 | |
Operating leases | 2,503 | | | 2,711 | |
Capitalized research and development(1) | 1,843 | | | 10,381 | |
Other | 1,665 | | | 3,244 | |
Total deferred tax assets | 14,796 | | | 26,851 | |
Valuation allowance | (7,129) | | | (9,553) | |
Total deferred tax assets net of valuation allowance | 7,667 | | | 17,298 | |
Deferred tax liabilities: | | | |
Property and equipment, net | (5,237) | | | (6,607) | |
| | | |
Net investment gains | (3,229) | | | (2,361) | |
Operating leases | (2,228) | | | (2,491) | |
Other | (946) | | | (1,092) | |
Total deferred tax liabilities | (11,640) | | | (12,551) | |
Net deferred tax assets (liabilities) | $ | (3,973) | | | $ | 4,747 | |
(1)As required by the 2017 Tax Cuts and Jobs Act, effective January 1, 2022, our research and development expenditures were capitalized and amortized which resulted in substantially higher cash taxes for 2022 with an equal amount of deferred tax benefit.
As of December 31, 2022, our federal, state, and foreign net operating loss carryforwards for income tax purposes were approximately $6.4 billion, $14.6 billion, and $1.8 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 2025 and the state net operating loss carryforwards will begin to expire in 2028. It is more likely than not that the majority of the 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, 2022, our Federal and California research and development credit carryforwards for income tax purposes were approximately $400 million and $5.8 billion, respectively. If not utilized, the Federal R&D credit will begin to expire in 2037 and the California R&D credit can be carried over indefinitely. We believe the majority of the federal tax credit and state tax credit is not likely to be realized.
As of December 31, 2022, our investment tax credit carryforwards for state income tax purposes were approximately $931 million and will begin to expire in 2025. We use the flow-through method of accounting for investment tax credits. We believe this tax credit is not likely to be realized.
As of December 31, 2022, we maintained a valuation allowance with respect to California deferred tax assets, certain federal net operating losses, certain state net operating losses and tax credits, net deferred tax assets relating to certain 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, |
| 2020 | | 2021 | | 2022 |
Beginning gross unrecognized tax benefits | $ | 3,377 | | | $ | 3,837 | | | $ | 5,158 | |
Increases related to prior year tax positions | 372 | | | 529 | | | 253 | |
Decreases related to prior year tax positions | (557) | | | (263) | | | (437) | |
Decreases related to settlement with tax authorities | (45) | | | (329) | | | (140) | |
Increases related to current year tax positions | 690 | | | 1,384 | | | 2,221 | |
Ending gross unrecognized tax benefits | $ | 3,837 | | | $ | 5,158 | | | $ | 7,055 | |
We are subject to income taxes in the U.S. and foreign jurisdictions. Significant judgment is required in evaluating our uncertain tax positions and determining our provision for income taxes. The total amount of gross unrecognized tax benefits was $3.8 billion, $5.2 billion, and $7.1 billion as of December 31, 2020, 2021, and 2022, respectively, of which $2.6 billion, $3.7 billion, and $5.3 billion, if recognized, would affect our effective tax rate, respectively.
As of December 31, 2021 and 2022, we accrued $270 million and $346 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 2015 through 2021 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 resolutions occur. Although the timing of resolution, settlement, and closure of audits is not certain, it is reasonably possible that our unrecognized tax benefits from certain U.S. federal, state, and non U.S. tax positions could decrease by approximately $1.8 billion in the next 12 months. Positions that may be resolved include various U.S. and non-U.S. matters.
Note 15. Information about Segments and Geographic Areas
We 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 and in-app purchases, and hardware; and fees received for subscription-based products such as YouTube Premium and YouTube TV.
•Google Cloud includes infrastructure and platform services, collaboration tools, and other services for enterprise customers. Google Cloud generates revenues from fees received for Google Cloud Platform services, Google Workspace communication and collaboration tools, and other enterprise services.
•Other Bets is a combination of multiple operating segments that are not individually material. Revenues from Other Bets are generated primarily from the sale of health technology and internet services.
Revenues, certain costs, such as costs associated with content and traffic acquisition, certain engineering activities, and hardware, as well as certain 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 certain fines and settlements, as well as costs associated with certain shared R&D activities. Additionally, hedging gains (losses) related to revenue are included in corporate costs.
As AI is critical to delivering our mission of bringing our breakthrough innovations into the real world, beginning in January 2023, we will update our segment reporting relating to certain of Alphabet's AI activities. DeepMind, previously reported within Other Bets, will be reported as part of Alphabet's corporate costs, reflecting its increasing collaboration with Google Services, Google Cloud, and Other Bets. Prior periods will be recast to conform to the revised presentation.
Our operating segments are not evaluated using asset information.
The following table presents information about our segments (in millions):
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2020 | | 2021 | | 2022 |
Revenues: | | | | | |
Google Services | $ | 168,635 | | | $ | 237,529 | | | $ | 253,528 | |
Google Cloud | 13,059 | | | 19,206 | | | 26,280 | |
Other Bets | 657 | | | 753 | | | 1,068 | |
Hedging gains (losses) | 176 | | | 149 | | | 1,960 | |
Total revenues | $ | 182,527 | | | $ | 257,637 | | | $ | 282,836 | |
Operating income (loss): | | | | | |
Google Services | $ | 54,606 | | | $ | 91,855 | | | $ | 86,572 | |
Google Cloud | (5,607) | | | (3,099) | | | (2,968) | |
Other Bets | (4,476) | | | (5,281) | | | (6,083) | |
Corporate costs, unallocated | (3,299) | | | (4,761) | | | (2,679) | |
Total income from operations | $ | 41,224 | | | $ | 78,714 | | | $ | 74,842 | |
For revenues by geography see Note 2.
The following table presents long-lived assets by geographic area, which includes property and equipment, net and operating lease assets (in millions):
| | | | | | | | | | | |
| As of December 31, |
| 2021 | | 2022 |
Long-lived assets: | | | |
United States | $ | 80,207 | | | $ | 93,565 | |
International | 30,351 | | | 33,484 | |
Total long-lived assets | $ | 110,558 | | | $ | 127,049 | |
Note 16. Subsequent Event
In January 2023, we announced a reduction of our workforce of approximately 12,000 roles. We expect to incur employee severance and related charges of $1.9 billion to $2.3 billion, the majority of which will be recognized in the first quarter of 2023.
In addition, we are taking actions to optimize our global office space. As a result we expect to incur exit costs relating to office space reductions of approximately $0.5 billion in the first quarter of 2023. We may incur additional charges in the future as we further evaluate our real estate needs.