PARTIV Note1—OverviewandSummaryofSignificantAccountingPolicies PayPalHoldings,Inc. NotestoConsolidatedFinancialStatements—(Continued) represents an accumulation of the estimated amounts of probable transaction losses as of the reporting date, including thosewhichwehavenotyetidentified.Theallowanceismonitoredregularlyandisupdatedbasedonactuallossdata.The allowance is based on known facts and circumstances, internal factors including experience with similar cases, historical trends involving loss payment patterns, and the mix of transaction and loss types, as applicable. Additions to the allowance are reflected as a component of transaction and credit losses on our consolidated statements of income (loss). The allowance for transaction losses is included in accrued expenses and other current liabilities on our consolidated balance sheets. AllowanceforNegativeCustomerBalances Negative customer balances occur primarily when there are insufficient funds in a customers PayPal account to cover charges applied for Automated Clearing House returns, debit card transactions, and merchant-related chargebacks due to non-delivery or unsatisfactory delivery of purchased items, which are generally within the scope of our protection programs. Negative customer balances can be cured by the customer by adding funds to their account, receiving payments, or through back-up funding sources. We also utilize third-party collection agencies. For negative customer balances that are not expected to be cured or otherwise collected, we provide an allowance for expected losses. The allowancerepresentsexpectedlossesbasedonhistoricaltrendsinvolvingcollectionandwrite-offpatterns,internalfactors including our experience with similar cases, other known facts and circumstances, and reasonable and supportable macroeconomic forecasts, as applicable. Loss rates are derived using historical loss data for each delinquency bucket usingaroll rate model that capturesthe losses and the likelihood that a negative customer balance will be written off as the delinquency age of such balance increases. The loss rates are then applied to the outstanding negative customer balances. Once the quantitative calculation is performed, we review the adequacy of the allowance and determine if qualitative adjustmentsneed to be considered.We write-off negativecustomerbalancesin the month in whichthebalance becomesoutstandingfor 120 days. Write-offs that are recovered are recorded as a reduction to our allowance for negative customer balances. Negative customer balances are included in other current assets, net of the allowance on our consolidated balance sheets. Adjustments to the allowance for negative customer balances are recorded as a component of transactionand credit losses on our consolidatedstatementsof income(loss). DerivativeInstruments See“Note10—DerivativeInstruments”forinformationrelatedtothederivativeinstruments. Fair Value Measurements Wemeasurecertain financial assets and liabilities at fair value on a recurring basis and certain financial and non-financial assetsandliabilities at fair value on a non-recurring basis when a change in fair value or impairment is evidenced.Fair value is defined as the price received to sell an asset or paid to transfer a liability in the principal market for the asset or liability in an orderly transaction between market participants on the measurement date. Fair value is estimated by maximizing the useofobservableinputsandminimizingtheuseofunobservableinputs.Thecategorizationwithinthefollowingthree-level fair value hierarchy for our recurring and non-recurring fair value measurements is based upon the lowest level of input that is available and significant to the fair value measurement: • Level 1—Observableinputs,suchasunadjustedquotedpricesinactivemarketsforidenticalassetsorliabilities. • Level 2—Observable inputs other than Level 1 quoted prices, such as quoted prices for similar assets or liabilities, quotedpricesinmarketsthatarenotactiveorotherinputsthatareobservableorcanbemarket-corroborated. • Level 3—Unobservable inputs that cannot be directly corroborated by observable market data and that typically reflect managementsestimateofassumptionsthatmarketparticipantswoulduseinpricingtheassetorliability. See“Note9—FairValueMeasurementofAssetsandLiabilities”foradditionalinformationrelatedtoourfairvalue measurements. CryptoAssetSafeguardingLiabilityandCorrespondingSafeguardingAsset See “Note 7—Other Financial Statement Details” for information related to our crypto asset safeguarding liability and correspondingsafeguardingasset. 70 •2022AnnualReport