FACEBOOK INC, 10-K filed on 2/3/2017
Annual Report
Document and Entity Information (USD $)
In Billions, except Share data, unless otherwise specified
12 Months Ended
Dec. 31, 2016
Jun. 30, 2016
Jan. 30, 2017
Class A Common Stock
Jan. 30, 2017
Class B Common Stock
Entity Information
 
 
 
 
Document Type
10-K 
 
 
 
Amendment Flag
false 
 
 
 
Document Period End Date
Dec. 31, 2016 
 
 
 
Document Fiscal Year Focus
2016 
 
 
 
Document Fiscal Period Focus
FY 
 
 
 
Trading Symbol
FB 
 
 
 
Entity Registrant Name
FACEBOOK INC 
 
 
 
Entity Central Index Key
0001326801 
 
 
 
Current Fiscal Year End Date
--12-31 
 
 
 
Entity Filer Category
Large Accelerated Filer 
 
 
 
Entity Common Stock, Shares Outstanding
 
 
2,355,168,103 
534,813,231 
Entity Public Float
 
$ 274 
 
 
Well-known Seasoned Issuer
Yes 
 
 
 
Entity Voluntary Filers
No 
 
 
 
Entity Current Reporting Status
Yes 
 
 
 
CONSOLIDATED BALANCE SHEETS (USD $)
In Millions, unless otherwise specified
Dec. 31, 2016
Dec. 31, 2015
Current assets:
 
 
Cash and cash equivalents
$ 8,903 
$ 4,907 
Marketable securities
20,546 
13,527 
Accounts receivable, net of allowances for doubtful accounts of $94 and $68 as of December 31, 2016 and December 31, 2015, respectively
3,993 
2,559 
Prepaid expenses and other current assets
959 
659 
Total current assets
34,401 
21,652 
Property and equipment, net
8,591 
5,687 
Intangible assets, net
2,535 
3,246 
Goodwill
18,122 
18,026 
Other assets
1,312 
796 
Total assets
64,961 
49,407 
Current liabilities:
 
 
Accounts payable
302 
196 
Partners payable
280 
217 
Accrued expenses and other current liabilities
2,203 
1,449 
Deferred revenue and deposits
90 
56 
Current portion of capital lease obligations
Total current liabilities
2,875 
1,925 
Capital lease obligations, less current portion
107 
Other liabilities
2,892 
3,157 
Total liabilities
5,767 
5,189 
Commitments and contingencies
   
   
Stockholders' equity:
 
 
Common stock, $0.000006 par value; 5,000 million Class A shares authorized, 2,354 million and 2,293 million shares issued and outstanding, including 4 million and 8 million outstanding shares subject to repurchase, as of December 31, 2016 and December 31, 2015, respectively; 4,141 million Class B shares authorized, 538 million and 552 million shares issued and outstanding, including 2 million and 3 million outstanding shares subject to repurchase, as of December 31, 2016 and December 31, 2015, respectivel
Additional paid-in capital
38,227 
34,886 
Accumulated other comprehensive loss
(703)
(455)
Retained earnings
21,670 
9,787 
Total stockholders' equity
59,194 
44,218 
Total liabilities and stockholders' equity
$ 64,961 
$ 49,407 
CONSOLIDATED BALANCE SHEETS (Parenthetical) (USD $)
In Millions, except Share data, unless otherwise specified
Dec. 31, 2016
Dec. 31, 2015
Current assets:
 
 
Accounts receivable, allowances for doubtful accounts
$ 94 
$ 68 
Stockholders' equity:
 
 
Common stock, par value (in dollars per share)
$ 0.000006 
$ 0.000006 
Class A Common Stock
 
 
Stockholders' equity:
 
 
Common stock, par value (in dollars per share)
$ 0.000006 
 
Common stock, shares authorized
5,000,000,000 
5,000,000,000 
Common stock, shares, issued
2,354,000,000 
2,293,000,000 
Common stock, shares, outstanding
2,354,000,000 
2,293,000,000 
Common stock, outstanding shares subject to repurchase
4,000,000 
8,000,000 
Class B Common Stock
 
 
Stockholders' equity:
 
 
Common stock, par value (in dollars per share)
$ 0.000006 
 
Common stock, shares authorized
4,141,000,000 
4,141,000,000 
Common stock, shares, issued
538,000,000 
552,000,000 
Common stock, shares, outstanding
538,000,000 
552,000,000 
Common stock, outstanding shares subject to repurchase
2,000,000 
3,000,000 
CONSOLIDATED STATEMENTS OF INCOME (USD $)
In Millions, except Per Share data, unless otherwise specified
12 Months Ended
Dec. 31, 2016
Dec. 31, 2015
Dec. 31, 2014
Revenue
$ 27,638 
$ 17,928 
$ 12,466 
Costs and expenses:
 
 
 
Cost of revenue
3,789 
2,867 
2,153 
Research and development
5,919 
4,816 
2,666 
Marketing and sales
3,772 
2,725 
1,680 
General and administrative
1,731 
1,295 
973 
Total costs and expenses
15,211 
11,703 
7,472 
Income from operations
12,427 
6,225 
4,994 
Interest and other income/(expense), net
91 
(31)
(84)
Income before provision for income taxes
12,518 
6,194 
4,910 
Provision for income taxes
2,301 
2,506 
1,970 
Net income
10,217 
3,688 
2,940 
Less: Net income attributable to participating securities
29 
19 
15 
Net income attributable to Class A and Class B common stockholders
10,188 
3,669 
2,925 
Earnings per share attributable to Class A and Class B common stockholders:
 
 
 
Basic (in dollars per share)
$ 3.56 
$ 1.31 
$ 1.12 
Diluted (in dollars per share)
$ 3.49 
$ 1.29 
$ 1.10 
Weighted average shares used to compute earnings per share attributable to Class A and Class B common stockholders:
 
 
 
Basic (in shares)
2,863 
2,803 
2,614 
Diluted (in shares)
2,925 
2,853 
2,664 
Share-based compensation expense included in costs and expenses:
 
 
 
Share-based compensation expense
3,218 
2,969 
1,837 
Cost of revenue
 
 
 
Share-based compensation expense included in costs and expenses:
 
 
 
Share-based compensation expense
113 
81 
62 
Research and development
 
 
 
Share-based compensation expense included in costs and expenses:
 
 
 
Share-based compensation expense
2,494 
2,350 
1,328 
Marketing and sales
 
 
 
Share-based compensation expense included in costs and expenses:
 
 
 
Share-based compensation expense
368 
320 
249 
General and administrative
 
 
 
Share-based compensation expense included in costs and expenses:
 
 
 
Share-based compensation expense
$ 243 
$ 218 
$ 198 
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (USD $)
In Millions, unless otherwise specified
12 Months Ended
Dec. 31, 2016
Dec. 31, 2015
Dec. 31, 2014
Statement of Comprehensive Income [Abstract]
 
 
 
Net income
$ 10,217 
$ 3,688 
$ 2,940 
Other comprehensive loss:
 
 
 
Change in foreign currency translation adjustment, net of tax
(152)
(202)
(239)
Change in unrealized gain/loss on available-for-sale investments and other, net of tax
(96)
(25)
(3)
Comprehensive income
$ 9,969 
$ 3,461 
$ 2,698 
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (USD $)
In Millions, except Share data, unless otherwise specified
Total
Class A and Class B Common Stock
Additional Paid-In Capital
Accumulated Other Comprehensive (Loss) Income
Retained Earnings
Total stockholders' equity, beginning at Dec. 31, 2013
$ 15,470 
$ 0 
$ 12,297 
$ 14 
$ 3,159 
Common stock, shares outstanding beginning at Dec. 31, 2013
 
2,547,000,000 
 
 
 
Increase (Decrease) in Stockholders' Equity [Roll Forward]
 
 
 
 
 
Issuance of common stock for cash upon exercise of stock options, shares
 
9,000,000 
 
 
 
Issuance of common stock for cash upon exercise of stock options, value
18 
18 
 
 
Issuance of common stock related to acquisitions, shares
 
201,000,000 
 
 
 
Issuance of common stock related to acquisitions, value
14,344 
14,344 
 
 
Issuance of common stock for settlement of RSUs, shares
 
41,000,000 
 
 
 
Issuance of common stock for settlement of RSUs. value
 
 
 
Shares withheld related to net share settlement, shares
 
(1,000,000)
 
 
 
Shares withheld related to net share settlement, value
(73)
(73)
 
 
Share-based compensation, related to employee share-based awards
1,786 
 
1,786 
 
 
Tax benefit from share-based award activity
1,853 
 
1,853 
 
 
Other comprehensive loss
(242)
 
 
(242)
 
Net income
2,940 
 
 
 
2,940 
Total stockholders' equity, ending at Dec. 31, 2014
36,096 
30,225 
(228)
6,099 
Common stock, shares outstanding ending at Dec. 31, 2014
 
2,797,000,000 
 
 
 
Increase (Decrease) in Stockholders' Equity [Roll Forward]
 
 
 
 
 
Cumulative-effect adjustment from adoption of ASU 2016-09
1,705 
 
39 
 
1,666 
Issuance of common stock for cash upon exercise of stock options, shares
 
4,000,000 
 
 
 
Issuance of common stock for cash upon exercise of stock options, value
 
 
 
Issuance of common stock for settlement of RSUs, shares
 
44,000,000 
 
 
 
Issuance of common stock for settlement of RSUs. value
 
 
 
Shares withheld related to net share settlement, value
(20)
 
(20)
 
 
Share-based compensation, related to employee share-based awards
2,960 
 
2,960 
 
 
Tax benefit from share-based award activity
1,721 
 
1,721 
 
 
Other comprehensive loss
(227)
 
 
(227)
 
Net income
3,688 
 
 
 
3,688 
Total stockholders' equity, ending at Dec. 31, 2015
44,218 
34,886 
(455)
9,787 
Common stock, shares outstanding ending at Dec. 31, 2015
 
2,845,000,000 
 
 
 
Increase (Decrease) in Stockholders' Equity [Roll Forward]
 
 
 
 
 
Issuance of common stock for cash upon exercise of stock options, shares
 
3,000,000 
 
 
 
Issuance of common stock for cash upon exercise of stock options, value
16 
16 
 
 
Issuance of common stock related to acquisitions, shares
 
1,000,000 
 
 
 
Issuance of common stock related to acquisitions, value
74 
74 
 
 
Issuance of common stock for settlement of RSUs, shares
 
43,000,000 
 
 
 
Issuance of common stock for settlement of RSUs. value
 
 
 
Shares withheld related to net share settlement, value
(6)
 
(6)
 
 
Share-based compensation, related to employee share-based awards
3,218 
 
3,218 
 
 
Other comprehensive loss
(248)
 
 
(248)
 
Net income
10,217 
 
 
 
10,217 
Total stockholders' equity, ending at Dec. 31, 2016
$ 59,194 
$ 0 
$ 38,227 
$ (703)
$ 21,670 
Common stock, shares outstanding ending at Dec. 31, 2016
 
2,892,000,000 
 
 
 
CONSOLIDATED STATEMENTS OF CASH FLOWS (USD $)
In Millions, unless otherwise specified
12 Months Ended
Dec. 31, 2016
Dec. 31, 2015
Dec. 31, 2014
Cash flows from operating activities
 
 
 
Net income
$ 10,217 
$ 3,688 
$ 2,940 
Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
2,342 
1,945 
1,243 
Share-based compensation
3,218 
2,960 
1,786 
Deferred income taxes
(457)
(795)
(210)
Tax benefit from share-based award activity
1,721 
1,853 
Other
30 
17 
(24)
Changes in assets and liabilities:
 
 
 
Accounts receivable
(1,489)
(973)
(610)
Prepaid expenses and other current assets
(159)
(144)
(123)
Other assets
14 
(3)
(216)
Accounts payable
14 
18 
31 
Partners payable
67 
17 
(28)
Accrued expenses and other current liabilities
1,014 
513 
328 
Deferred revenue and deposits
35 
(9)
10 
Other liabilities
1,262 
1,365 
346 
Net cash provided by operating activities
16,108 
10,320 
7,326 
Cash flows from investing activities
 
 
 
Purchases of property and equipment
(4,491)
(2,523)
(1,831)
Purchases of marketable securities
(22,341)
(15,938)
(9,104)
Sales of marketable securities
13,894 
6,928 
8,438 
Maturities of marketable securities
1,261 
2,310 
1,909 
Acquisitions of businesses, net of cash acquired, and purchases of intangible assets
(123)
(313)
(4,975)
Change in restricted cash and deposits
61 
102 
(348)
Other investing activities, net
(2)
Net cash used in investing activities
(11,739)
(9,434)
(5,913)
Cash flows from financing activities
 
 
 
Principal payments on capital lease and other financing obligations
(312)
(119)
(243)
Other financing activities, net
(20)
(55)
Net cash used in financing activities
(310)
(139)
(298)
Effect of exchange rate changes on cash and cash equivalents
(63)
(155)
(123)
Net increase in cash and cash equivalents
3,996 
592 
992 
Cash and cash equivalents at beginning of period
4,907 
4,315 
3,323 
Cash and cash equivalents at end of period
8,903 
4,907 
4,315 
Cash paid during the period for:
 
 
 
Interest
11 
10 
14 
Income taxes, net
1,210 
270 
178 
Non-cash investing and financing activities:
 
 
 
Net change in accounts payable, accrued expenses and other current liabilities, and other liabilities related to property and equipment additions
272 
88 
91 
Fair value of shares issued related to acquisitions of businesses
14,344 
Promissory note payable issued in connection with an acquisition
198 
Settlement of contingent consideration liability
$ 33 
$ 0 
$ 0 
Summary of Significant Accounting Policies
Summary of Significant Accounting Policies
Summary of Significant Accounting Policies
Organization and Description of Business
Facebook was incorporated in Delaware in July 2004. Our mission is to give people the power to share and make the world more open and connected. We generate substantially all of our revenue from advertising.
Basis of Presentation
We prepared the consolidated financial statements in accordance with U.S. generally accepted accounting principles (GAAP). The consolidated financial statements include the accounts of Facebook, Inc. and its wholly owned subsidiaries. All intercompany balances and transactions have been eliminated.
Use of Estimates
Conformity with GAAP requires the use of estimates and judgments that affect the reported amounts in the consolidated financial statements and accompanying notes. These estimates form the basis for judgments we make about the carrying values of our assets and liabilities, which are not readily apparent from other sources. We base our estimates and judgments on historical information and on various other assumptions that we believe are reasonable under the circumstances. GAAP requires us to make estimates and judgments in several areas, including, but not limited to, those related to revenue recognition, collectability of accounts receivable, contingent liabilities, fair value of financial instruments, fair value of acquired intangible assets and goodwill, useful lives of intangible assets and property and equipment, and income taxes. These estimates are based on management's knowledge about current events and expectations about actions we may undertake in the future. Actual results could differ materially from those estimates.
Revenue Recognition
We recognize revenue once all of the following criteria have been met:
persuasive evidence of an arrangement exists;
delivery of our obligations to our customer has occurred;
the price is fixed or determinable; and
collectability of the related receivable is reasonably assured.
Revenue for the years ended December 31, 2016, 2015, and 2014 consists of the following (in millions):
 
Year Ended December 31,
 
2016
 
2015
 
2014
Advertising
$
26,885

 
$
17,079

 
$
11,492

Payments and other fees
753

 
849

 
974

Total revenue
$
27,638

 
$
17,928

 
$
12,466

 
Advertising
Advertising revenue is generated by displaying ad products on the Facebook properties, and third-party affiliated websites or mobile applications. The arrangements are evidenced by either online acceptance of terms and conditions or contracts that stipulate the types of advertising to be delivered, the timing and the pricing. Marketers pay for ad products either directly or through their relationships with advertising agencies, based on the number of clicks made by our users, the number of actions taken by our users, or the number of impressions delivered. The typical term of an advertising arrangement is less than one month with billing generally occurring after the delivery of the advertisement.
We recognize revenue from the delivery of click-based ads in the period in which a user clicks on the content, and action-based ads in the period in which a user takes the action the marketer contracted for. We recognize revenue from the display of impression-based ads in the contracted period in which the impressions are delivered. Impressions are considered delivered when an ad is displayed to users.
For advertising revenue arrangements where we are not the primary obligor, we recognize revenue on a net basis.
Payments and Other Fees
We enable Payments from people to purchase virtual and digital goods from our developers. People can transact and make payments on the Facebook website by using debit cards and credit cards, PayPal, mobile phone payments, gift cards, or other methods.
When a person engages in a payment transaction for the purchase of a virtual or digital good from a developer, we remit to the developer an amount that is based on the total amount of the transaction less the processing fee that we charge the developer. The price of the purchase is an amount that is solely determined by the developer. Our revenue is the net amount of the transaction, representing our processing fee for the service performed. We record revenue on a net basis as we do not consider ourselves to be the principal in the sale of the virtual or digital good to the person. Additionally, we record all Payments revenue at the time of the purchase of the related virtual goods, net of estimated refunds or chargebacks.
Other fees, which includes the delivery of virtual reality platform devices and related platform sales, and our ad serving and measurement products, were not material in all periods presented in our financial statements.
Revenue is recognized net of applicable sales and other taxes.
Cost of Revenue
Our cost of revenue consists primarily of expenses associated with the delivery and distribution of our products. These include expenses related to the operation of our data centers, such as facility and server equipment depreciation, salaries, benefits, and share-based compensation for employees on our operations teams, and energy and bandwidth costs. Cost of revenue also includes credit card and other transaction fees related to processing customer transactions, amortization of intangible assets, costs associated with data partner arrangements, and cost of virtual reality platform device inventory sold.
Share-based Compensation
We account for share-based employee compensation plans under the fair value recognition and measurement provisions of GAAP. Those provisions require all share-based payments to employees, including grants of stock options and restricted stock units (RSUs), to be measured based on the grant date fair value of the awards, with the resulting expense generally recognized on a straight-line basis in our consolidated statements of income over the period during which the employee is required to perform service in exchange for the award. The majority of our awards are earned over a service period of four years.
In the fourth quarter of 2016, we elected to early adopt Accounting Standards Update No. 2016-09, Compensation-Stock Compensation (Topic 718): Improvement to Employee Share-based Payment Accounting (ASU 2016-09) issued by the Financial Accounting Standards Board (FASB), which among other items, provides an accounting policy election to account for forfeitures as they occur, rather than to account for them based on an estimate of expected forfeitures. We elected to account for forfeitures as they occur and therefore, share-based compensation expense for the year ended December 31, 2016 has been calculated based on actual forfeitures in our consolidated statements of income, rather than our previous approach which was net of estimated forfeitures. The net cumulative effect of this change increased additional paid-in capital as of January 1, 2016 by $39 million. Share-based compensation expense for the years ended December 31, 2015 and 2014 were recorded net of estimated forfeitures, which were based on historical forfeitures and adjusted to reflect changes in facts and circumstances, if any.
We have historically issued unvested restricted shares to employee stockholders of certain acquired companies. As these awards are generally subject to continued post-acquisition employment, we have accounted for them as post-acquisition share-based compensation expense. We recognize compensation expense equal to the grant date fair value of the common stock on a straight-line basis over the period during which the employee is required to perform service in exchange for the award.
Income Taxes
We recognize income taxes under the asset and liability method. We recognize deferred income tax assets and liabilities for the expected future consequences of temporary differences between the financial reporting and tax bases of assets and liabilities. These differences are measured using the enacted statutory tax rates that are expected to apply to taxable income for the years in which differences are expected to reverse. We recognize the effect on deferred income taxes of a change in tax rates in income in the period that includes the enactment date.
We record a valuation allowance to reduce our deferred tax assets to the net amount that we believe is more likely than not to be realized. We consider all available evidence, both positive and negative, including historical levels of income, expectations and risks associated with estimates of future taxable income and ongoing tax planning strategies in assessing the need for a valuation allowance.
We recognize tax benefits from uncertain tax positions only if we believe that it is more likely than not that the tax position will be sustained on examination by the taxing authorities based on the technical merits of the position. These uncertain tax positions include our estimates for transfer pricing that have been developed based upon analyses of appropriate arms-length prices. Similarly, our estimates related to uncertain tax positions concerning research tax credits are based on an assessment of whether our available documentation corroborating the nature of our activities supporting the tax credits will be sufficient. Although we believe that we have adequately reserved for our uncertain tax positions (including net interest and penalties), we can provide no assurance that the final tax outcome of these matters will not be materially different. We make adjustments to these reserves when facts and circumstances change, such as the closing of a tax audit or the refinement of an estimate. To the extent that the final tax outcome of these matters is different than the amounts recorded, such differences will affect the provision for income taxes in the period in which such determination is made and could have a material impact on our financial position and results of operations.
Advertising Expense
Advertising costs are expensed when incurred and are included in marketing and sales expenses in the accompanying consolidated statements of income. We incurred advertising expenses of $310 million, $281 million, and $135 million for the years ended December 31, 2016, 2015, and 2014, respectively.
Cash and Cash Equivalents, and Marketable Securities
Cash and cash equivalents primarily consist of cash on deposit with banks and investments in money market funds with maturities of 90 days or less from the date of purchase.
We hold investments in marketable securities, consisting of U.S. government securities, U.S. government agency securities, and corporate debt securities. We classify our marketable securities as available-for-sale investments in our current assets because they represent investments of cash available for current operations. Our available-for-sale investments are carried at estimated fair value with any unrealized gains and losses, net of taxes, included in accumulated other comprehensive (loss) income in stockholders' equity. Unrealized losses are charged against interest and other income/(expense), net when a decline in fair value is determined to be other-than-temporary. We have not recorded any such impairment charge in the periods presented. We determine realized gains or losses on sale of marketable securities on a specific identification method, and record such gains or losses as interest and other income/(expense), net.
We classify certain restricted cash balances within prepaid expenses and other current assets and other assets on the accompanying consolidated balance sheets based upon the term of the remaining restrictions.
Fair Value of Financial Instruments
We apply fair value accounting for all financial assets and liabilities and non-financial assets and liabilities that are recognized or disclosed at fair value in the financial statements on a recurring basis. We define fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities, which are required to be recorded at fair value, we consider the principal or most advantageous market in which we would transact and the market-based risk measurements or assumptions that market participants would use in pricing the asset or liability, such as risks inherent in valuation techniques, transfer restrictions and credit risk. Fair value is estimated by applying the following hierarchy, which prioritizes the inputs used to measure fair value into three levels and bases the categorization within the hierarchy upon the lowest level of input that is available and significant to the fair value measurement:
Level 1-Quoted prices in active markets for identical assets or liabilities.
Level 2-Observable inputs other than quoted prices in active markets for identical assets and liabilities, quoted prices for identical or similar assets or liabilities in inactive markets, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3-Inputs that are generally unobservable and typically reflect management's estimate of assumptions that market participants would use in pricing the asset or liability.
Our valuation techniques used to measure the fair value of money market funds and marketable debt securities were derived from quoted market prices or alternative pricing sources and models utilizing market observable inputs. Our valuation technique used to measure the fair value of our contingent consideration liability prior to completion of the performance milestones, was based on the present value of probability-weighted future cash flows related to the contingent earn-out criteria and the fair value of our common stock on each reporting date. Upon completion of the performance milestones in the second quarter of 2016, we measure fair value of our contingent consideration liability based on the fair value of our common stock on each reporting date.
Accounts Receivable and Allowance for Doubtful Accounts
Accounts receivable are recorded and carried at the original invoiced amount less an allowance for any potential uncollectible amounts. We make estimates for the allowance for doubtful accounts based upon our assessment of various factors, including historical experience, the age of the accounts receivable balances, credit quality of our customers, current economic conditions, and other factors that may affect customers' ability to pay.
Property and Equipment
Property and equipment, which includes amounts recorded under capital leases, are stated at cost less accumulated depreciation. Depreciation is computed using the straight-line method over the estimated useful lives of the assets or the remaining lease term, whichever is shorter.
The estimated useful lives of property and equipment are described below:
Property and Equipment 
 
Useful Life 
Network equipment
 
Three to 25 years
Buildings
 
Three to 30 years
Computer software, office equipment and other
 
Two to five years
Leased equipment and leasehold improvements
 
Lesser of estimated useful life or remaining lease term
 
Land and assets held within construction in progress are not depreciated. Construction in progress is related to the construction or development of property and equipment that have not yet been placed in service for their intended use.
The cost of maintenance and repairs is expensed as incurred. When assets are retired or otherwise disposed of, the cost and related accumulated depreciation are removed from their respective accounts, and any gain or loss on such sale or disposal is reflected in income from operations.
Lease Obligations
We enter into lease arrangements for office space, land, facilities, data centers, and equipment under non-cancelable capital and operating leases. Certain of the operating lease agreements contain rent holidays, rent escalation provisions, and purchase options. Rent holidays and rent escalation provisions are considered in determining the straight-line rent expense to be recorded over the lease term. The lease term begins on the date of initial possession of the leased property for purposes of recognizing lease expense on a straight-line basis over the term of the lease. We do not assume renewals in our determination of the lease term unless the renewals are deemed to be reasonably assured at lease inception.
We record assets and liabilities for the estimated construction costs incurred by third parties under build-to-suit lease arrangements to the extent that we are involved in the construction of structural improvements or bear construction risk prior to commencement of a lease.
Loss Contingencies
We are involved in various lawsuits, claims, investigations, and proceedings that arise in the ordinary course of business. We record a liability when we believe that it is both probable that a loss has been incurred and the amount can be reasonably estimated. Significant judgment is required to determine both probability and the estimated amount. We review these provisions at least quarterly and adjust these provisions accordingly to reflect the impact of negotiations, settlements, rulings, advice of legal counsel, and updated information.
Business Combinations
We allocate the fair value of purchase consideration to the tangible assets acquired, liabilities assumed and intangible assets acquired based on their estimated fair values. The excess of the fair value of purchase consideration over the fair values of these identifiable assets and liabilities is recorded as goodwill. Such valuations require management to make significant estimates and assumptions, especially with respect to intangible assets. Significant estimates in valuing certain intangible assets include, but are not limited to, future expected cash flows from acquired users, acquired technology, and trade names from a market participant perspective, useful lives and discount rates. Management’s estimates of fair value are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable and, as a result, actual results may differ from estimates. During the measurement period, which is one year from the acquisition date, we may record adjustments to the assets acquired and liabilities assumed, with the corresponding offset to goodwill. Upon the conclusion of the measurement period, any subsequent adjustments are recorded to earnings.
Long-Lived Assets, Including Goodwill and Other Acquired Intangible Assets
We evaluate the recoverability of property and equipment and finite-lived intangible assets for possible impairment whenever events or circumstances indicate that the carrying amount of such assets may not be recoverable. The evaluation is performed at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. Recoverability of these assets is measured by a comparison of the carrying amounts to the future undiscounted cash flows the assets are expected to generate. If such review indicates that the carrying amount of property and equipment and intangible assets is not recoverable, the carrying amount of such assets is reduced to fair value. We have not recorded any significant impairment charges during the years presented.
We review goodwill for impairment at least annually or more frequently if events or changes in circumstances would more likely than not reduce the fair value of our single reporting unit below its carrying value. As of December 31, 2016, no impairment of goodwill has been identified.
Acquired indefinite-lived intangible assets related to our in-process research and development (IPR&D) are capitalized and subject to impairment testing until completion or abandonment of the projects. Upon successful completion of each project, we make a separate determination of useful life of the acquired indefinite-lived intangible assets and the related amortization is recorded as an expense over the estimated useful life of the specific projects.
Acquired finite-lived intangible assets are amortized on a straight-line basis over the estimated useful lives of the assets. We routinely review the remaining estimated useful lives of property and equipment and finite-lived intangible assets. If we reduce the estimated useful life assumption for any asset, the remaining unamortized balance is amortized or depreciated over the revised estimated useful life.
Deferred Revenue and Deposits
Deferred revenue consists of billings in advance of revenue recognition. Deposits relate to unused balances held on behalf of our users. Once this balance is utilized by a user, approximately 70% of this amount would then be payable to the developer and the balance would be recognized as revenue.
Deferred revenue and deposits consists of the following (in millions):
 
December 31,
 
2016
 
2015
Deferred revenue
$
62

 
$
28

Deposits
28

 
28

Total deferred revenue and deposits
$
90

 
$
56

 
Foreign Currency
Generally the functional currency of our international subsidiaries is the local currency. We translate the financial statements of these subsidiaries to U.S. dollars using month-end rates of exchange for assets and liabilities, and average rates of exchange for revenue, costs, and expenses. Translation gains and losses are recorded in accumulated other comprehensive (loss) income as a component of stockholders' equity. As of December 31, 2016 and 2015, we had a cumulative translation loss, net of tax of $582 million and $430 million, respectively. Net losses resulting from foreign exchange transactions were $76 million, $66 million, and $87 million for the years ended December 31, 2016, 2015, and 2014, respectively. These losses were recorded as interest and other income/(expense), net in our consolidated statements of income.
Credit Risk and Concentration
Our financial instruments that are potentially subject to concentrations of credit risk consist primarily of cash, cash equivalents, restricted cash, marketable securities, and accounts receivable. The majority of cash equivalents consists of short-term money market funds, which are managed by reputable financial institutions. Marketable securities consist of investments in U.S. government securities, U.S. government agency securities, and corporate debt securities. Our investment policy limits investment instruments to U.S. government securities, U.S. government agency securities, and corporate debt securities with the main objective of preserving capital and maintaining liquidity.
Accounts receivable are typically unsecured and are derived from revenue earned from customers across different industries and countries. We generated 46%, 47%, and 45% of our revenue for the years ended December 31, 2016, 2015, and 2014, respectively, from marketers and developers based in the United States, with the majority of revenue outside of the United States coming from customers located in western Europe, China, Canada, and Australia.
We perform ongoing credit evaluations of our customers, and generally do not require collateral. We maintain an allowance for estimated credit losses. During the years ended December 31, 2016, 2015, and 2014, our bad debt expenses were $66 million, $44 million, and $19 million, respectively. In the event that accounts receivable collection cycles deteriorate, our operating results and financial position could be adversely affected.
No customer represented 10% or more of total revenue during the years ended December 31, 2016, 2015, and 2014.
 Segments
Our chief operating decision-maker is our Chief Executive Officer who makes resource allocation decisions and assesses performance based on financial information presented on a consolidated basis. There are no segment managers who are held accountable by the chief operating decision-maker, or anyone else, for operations, operating results, and planning for levels or components below the consolidated unit level. Accordingly, we have determined that we have a single reportable segment and operating unit structure.
Accounting Pronouncements Adopted in 2016
In March 2016, the FASB issued ASU 2016-09 to simplify certain aspects of the accounting for share-based payment transactions to employees. The new standard requires excess tax benefits and tax deficiencies to be recorded in the statements of income as a component of the provision for income taxes when stock awards vest or are settled. In addition, it eliminates the requirement to reclassify cash flows related to excess tax benefits from operating activities to financing activities on the consolidated statements of cash flows. The standard also provides an accounting policy election to account for forfeitures as they occur, allows us to withhold more of an employee’s vesting shares for tax withholding purposes without triggering liability accounting, and clarifies that all cash payments made to tax authorities on an employee’s behalf for withheld shares should be presented as a financing activity on our cash flows statement. The new standard is effective for us beginning January 1, 2017, with early adoption permitted.
We elected to early adopt the new guidance in the fourth quarter of 2016 which required us to reflect any adjustments as of January 1, 2016, the beginning of the annual period that includes the interim period of adoption. Upon adoption, excess tax benefits or deficiencies from share-based award activity are reflected in the consolidated statements of income as a component of the provision for income taxes, whereas they previously were recognized in equity. We also elected to account for forfeitures as they occur, rather than estimate expected forfeitures. The adoption of ASU 2016-09 resulted in net cumulative-effect adjustment of $1.67 billion increase to retained earnings as of January 1, 2016, mostly related to the recognition of the previously unrecognized excess tax benefits using the modified retrospective method. The previously unrecognized excess tax effects were recorded as a reduction to tax liability or an increase to deferred tax asset.
We adopted the aspects of the standard affecting the cash flow presentation retrospectively, and accordingly, to conform to the current year presentation, we reclassified $1.72 billion and $1.87 billion of excess tax benefits under financing activities to operating activities for the years ended December 31, 2015 and 2014, respectively, on our consolidated statements of cash flows. The presentation requirements for cash flows related to employee taxes paid for withheld shares had no impact to any of the periods presented on our consolidated statements of cash flows since such cash flows have historically been presented as a financing activity.
Adoption of the new standard also resulted in (i) reduction to our provision for income taxes of $934 million for the year ended December 31, 2016, mostly related to the recognition of excess tax benefits from share-based compensation awards that vested or settled in 2016, and (ii) adjustments to our unaudited selected quarterly data previously reported for fiscal year 2016 as follows:
 
March 31, 2016
 
June 30, 2016
 
September 30, 2016
 (in millions)
As reported
 
As adjusted
 
As reported
 
As adjusted
 
As reported
 
As adjusted
Consolidated Balance Sheets Data:
(Unaudited)
Other assets
$
700

 
$
886

 
$
703

 
$
935

 
$
660

 
$
990

Total assets
$
52,075

 
$
52,262

 
$
55,739

 
$
55,968

 
$
59,674

 
$
60,007

Other liabilities
$
3,116

 
$
1,867

 
$
3,145

 
$
2,170

 
$
2,964

 
$
2,290

Total liabilities
$
4,925

 
$
3,674

 
$
5,356

 
$
4,373

 
$
5,559

 
$
4,886

Common stock and additional paid-in capital
$
36,129

 
$
35,673

 
$
37,405

 
$
36,494

 
$
38,756

 
$
37,391

Retained earnings
$
11,297

 
$
13,191

 
$
13,352

 
$
15,475

 
$
15,731

 
$
18,102

 
 
 
 
 
 
 
 
 
 
 
 
 
Three months ended March 31, 2016
 
Three months ended June 30, 2016
 
Three months ended September 30, 2016
 (in millions, except percentages and per share amounts)
As reported
 
As adjusted
 
As reported
 
As adjusted
 
As reported
 
As adjusted
Consolidated Statements of Income Data:
(Unaudited)
Share-based compensation included in costs and expenses
$
747

 
$
746

 
$
805

 
$
817

 
$
819

 
$
824

Total costs and expenses
$
3,373

 
$
3,372

 
$
3,690

 
$
3,702

 
$
3,889

 
$
3,894

Provision for income taxes
$
555

 
$
328

 
$
711

 
$
471

 
$
790

 
$
537

Net income
$
1,510

 
$
1,738

 
$
2,055

 
$
2,283

 
$
2,379

 
$
2,627

Effective tax rate
27
%
 
16
%
 
26
%
 
17
%
 
25
%
 
17
%
Earnings per share attributable to Class A and Class B common stockholders:
 
 
 
 
 
 
 
 
 
 
 
Basic
$
0.53

 
$
0.61

 
$
0.72

 
$
0.80

 
$
0.83

 
$
0.91

Diluted
$
0.52

 
$
0.60

 
$
0.71

 
$
0.78

 
$
0.82

 
$
0.90

Weighted average shares used to compute earnings per share attributable to Class A and Class B common stockholders:
 
 
 
 
 
 
 
 
 
 
 
Diluted
2,888

 
2,905

 
2,904

 
2,921

 
2,915

 
2,931

 
 
 
 
 
 
 
 
 
 
 
 
 
Three months ended March 31, 2016
 
Six months ended June 30, 2016
 
Nine months ended September 30, 2016
 (in millions)
As reported
 
As adjusted
 
As reported
 
As adjusted
 
As reported
 
As adjusted
Consolidated Statements of Cash Flows Data:
(Unaudited)
Net cash provided by operating activities
$
2,983

 
$
3,477

 
$
6,181

 
$
7,142

 
$
9,758

 
$
11,178

Net cash provided by (used in) financing activities
$
184

 
$
(310
)
 
$
655

 
$
(306
)
 
$
1,106

 
$
(314
)

In August 2016, the FASB issued Accounting Standards Update No. 2016-15, Statement of Cash Flows (Topic 230) (ASU 2016-15), which addresses eight specific cash flow classification issues to reduce diversity in practice. This guidance will be effective for us in the first quarter of 2017 on a retrospective basis and early adoption is permitted. We elected to early adopt this guidance in the third quarter of 2016 on a retrospective basis. There was no reclassification impact of the adoption on our consolidated statement of cash flows for the years ended December 31, 2016, 2015 and 2014, and such statements have been presented in accordance with this new guidance.
Accounting Pronouncements Not Yet Adopted
In May 2014, the FASB issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (Topic 606) (ASU 2014-09), which amends the existing accounting standards for revenue recognition. In August 2015, the FASB issued ASU No. 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, which delays the effective date of ASU 2014-09 by one year. The FASB also agreed to allow entities to choose to adopt the standard as of the original effective date. In March 2016, the FASB issued Accounting Standards Update No. 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net) (ASU 2016-08) which clarifies the implementation guidance on principal versus agent considerations. The guidance includes indicators to assist an entity in determining whether it controls a specified good or service before it is transferred to the customers. The new revenue recognition standard will be effective for us in the first quarter of 2018, with the option to adopt it in the first quarter of 2017. We currently anticipate adopting the new standard effective January 1, 2018. The new standard also permits two methods of adoption: retrospectively to each prior reporting period presented (full retrospective method), or retrospectively with the cumulative effect of initially applying the guidance recognized at the date of initial application (the modified retrospective method). We currently anticipate adopting the standard using the modified retrospective method. While we are still in the process of completing our analysis on the impact this guidance will have on our consolidated financial statements and related disclosures, we do not expect the impact to be material.
In February 2016, the FASB issued Accounting Standards Update No. 2016-02, Leases (Topic 842) (ASU 2016-02), which generally requires companies to recognize operating and financing lease liabilities and corresponding right-of-use assets on the balance sheet. This guidance will be effective for us in the first quarter of 2019 on a modified retrospective basis and early adoption is permitted. We are still evaluating the effect that this guidance will have on our consolidated financial statements and related disclosures.
In October 2016, the FASB issued Accounting Standards Update No. 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers Other than Inventory (ASU 2016-16), which requires companies to recognize the income-tax consequences of an intra-entity transfer of an asset other than inventory. This guidance will be effective for us in the first quarter of 2018, with the option to adopt it in the first quarter of 2017. We currently anticipate adopting the new standard effective January 1, 2018, and do not expect the standard to have a material impact on our consolidated financial statements.
In November 2016, the FASB issued Accounting Standards Update No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash (ASU 2016-18), which requires companies to include amounts generally described as restricted cash and restricted cash equivalents in cash and cash equivalents when reconciling beginning-of-period and end-of-period total amounts shown on the statement of cash flows. This guidance will be effective for us in the first quarter of 2018 and early adoption is permitted. We are still evaluating the effect that this guidance will have on our consolidated financial statements and related disclosures.
Earnings per Share
Earnings per Share
Earnings per Share
We compute earnings per share (EPS) of Class A and Class B common stock using the two-class method required for participating securities. We consider restricted stock awards to be participating securities because holders of such shares have non-forfeitable dividend rights in the event of our declaration of a dividend for common shares.
Undistributed earnings allocated to participating securities are subtracted from net income in determining net income attributable to common stockholders. Basic EPS is computed by dividing net income attributable to common stockholders by the weighted-average number of shares of our Class A and Class B common stock outstanding, adjusted for outstanding shares that are subject to repurchase.
For the calculation of diluted EPS, net income attributable to common stockholders for basic EPS is adjusted by the effect of dilutive securities, such as awards under our equity compensation plans and inducement awards under separate non-plan restricted stock unit (RSU) award agreements. In addition, the computation of the diluted EPS of Class A common stock assumes the conversion of our Class B common stock to Class A common stock, while the diluted EPS of Class B common stock does not assume the conversion of those shares to Class A common stock. Diluted EPS attributable to common stockholders is computed by dividing the resulting net income attributable to common stockholders by the weighted-average number of fully diluted common shares outstanding.
Basic and dilutive securities in our basic and diluted EPS calculation for the year ended December 31, 2016 also included the effect of earn-out shares which issuance was contingent upon completion of certain milestones. The performance milestones related to our earn-out shares were completed in the second quarter of 2016. Basic and dilutive securities in our basic and diluted EPS calculation for the years ended December 31, 2015 and 2014 excluded the effect of these earn-out shares because the milestones were not met as of December 31, 2015.
Certain RSUs were excluded from the EPS calculation because the impact would be anti-dilutive. These excluded RSUs were not material for the years ended December 31, 2016, 2015, and 2014, respectively.
Basic and diluted EPS are the same for each class of common stock because they are entitled to the same liquidation and dividend rights.
The numerators and denominators of the basic and diluted EPS computations for our common stock are calculated as follows (in millions, except per share amounts):
 
Year Ended December 31,
 
2016
 
2015
 
2014
 
Class
A
 
Class
B
 
Class
A
 
Class
B
 
Class
A
 
Class
B 
Basic EPS:
 
 
 
 
 
 
 
 
 
 
 
Numerator
 
 
 
 
 
 
 
 
 
 
 
Net income
$
8,270

 
$
1,947

 
$
2,959

 
$
729

 
$
2,308

 
$
632

Less: Net income attributable to participating securities
24

 
5

 
15

 
4

 
12

 
3

Net income attributable to common stockholders
$
8,246

 
$
1,942

 
$
2,944

 
$
725

 
$
2,296

 
$
629

Denominator
 
 
 
 
 
 
 
 
 
 
 
Weighted average shares outstanding
2,323

 
548

 
2,259

 
559

 
2,059

 
568

Less: Shares subject to repurchase
6

 
2

 
10

 
5

 
6

 
7

Number of shares used for basic EPS computation
2,317

 
546

 
2,249

 
554

 
2,053

 
561

Basic EPS
$
3.56

 
$
3.56

 
$
1.31

 
$
1.31

 
$
1.12

 
$
1.12

Diluted EPS:
 
 
 
 
 
 
 
 
 
 
 
Numerator
 
 
 
 
 
 
 
 
 
 
 
Net income attributable to common stockholders
$
8,246

 
$
1,942

 
$
2,944

 
$
725

 
$
2,296

 
$
629

Reallocation of net income attributable to participating securities
29

 

 
19

 

 
15

 

Reallocation of net income as a result of conversion of Class B to Class A common stock
1,942

 

 
725

 

 
629

 

Reallocation of net income to Class B common stock

 
14

 

 
15

 

 
23

Net income attributable to common stockholders for diluted EPS
$
10,217

 
$
1,956

 
$
3,688

 
$
740

 
$
2,940

 
$
652

Denominator
 
 
 
 
 
 
 
 
 
 
 
Number of shares used for basic EPS computation
2,317

 
546

 
2,249

 
554

 
2,053

 
561

Conversion of Class B to Class A common stock
546

 

 
554

 

 
561

 

Weighted average effect of dilutive securities:
 
 
 
 
 
 
 
 
 
 
 
Employee stock options
6

 
6

 
8

 
8

 
13

 
13

RSUs
49

 
5

 
37

 
9

 
30

 
13

Shares subject to repurchase
5

 
1

 
5

 
2

 
7

 
4

Earn-out shares
2

 
2

 

 

 

 

Number of shares used for diluted EPS computation
2,925

 
560

 
2,853

 
573

 
2,664

 
591

Diluted EPS
$
3.49

 
$
3.49

 
$
1.29

 
$
1.29

 
$
1.10

 
$
1.10

Cash and Cash Equivalents, and Marketable Securities
Cash and Cash Equivalents, and Marketable Securities
Cash and Cash Equivalents, and Marketable Securities
The following table sets forth the cash and cash equivalents, and marketable securities (in millions):
 
December 31,
 
2016
 
2015
Cash and cash equivalents:
 
 
 
Cash
$
1,364

 
$
1,703

Money market funds
5,409

 
2,409

U.S. government securities
1,463

 
597

U.S. government agency securities
667

 
145

Corporate debt securities

 
53

Total cash and cash equivalents
8,903

 
4,907

Marketable securities:
 
 
 
U.S. government securities
7,130

 
5,948

U.S. government agency securities
7,411

 
4,475

Corporate debt securities
6,005

 
3,104

Total marketable securities
20,546

 
13,527

Total cash and cash equivalents, and marketable securities
$
29,449

 
$
18,434


The gross unrealized gains or losses on our marketable securities as of December 31, 2016 and 2015 were not significant. In addition, the gross unrealized loss that had been in a continuous loss position for 12 months or longer was not significant as of December 31, 2016 and 2015. As of December 31, 2016, we considered the decreases in market value on our marketable securities to be temporary in nature and did not consider any of our investments to be other-than-temporarily impaired.
The following table classifies our marketable securities by contractual maturities (in millions):
 
December 31,
 
2016
 
2015
Due in one year
$
4,966

 
$
5,029

Due in one to five years
15,580

 
8,498

Total
$
20,546

 
$
13,527

Fair Value Measurement
Fair Value Measurement
Fair Value Measurement
The following table summarizes, for assets or liabilities measured at fair value, the respective fair value and the classification by level of input within the fair value hierarchy (in millions):
 
 
 
 
Fair Value Measurement at Reporting Date Using
Description 
 
December 31,
2016
 
Quoted Prices in Active Markets for Identical Assets
(Level 1)
 
Significant Other Observable Inputs
(Level 2)
 
Significant Unobservable Inputs
(Level 3)
Cash equivalents:
 
 
 
 
 
 
 
 
Money market funds
 
$
5,409

 
$
5,409

 
$

 
$

U.S. government securities
 
1,463

 
1,463

 

 

U.S. government agency securities
 
667

 
667

 

 

Marketable securities:
 
 
 
 
 
 
 
 
U.S. government securities
 
7,130

 
7,130

 

 

U.S. government agency securities
 
7,411

 
7,411

 

 

Corporate debt securities
 
6,005

 

 
6,005

 

Total cash equivalents and marketable securities
 
$
28,085

 
$
22,080

 
$
6,005

 
$

 
 
 
 
 
 
 
 
 
Accrued expenses and other current liabilities:
 
 
 
 
 
 
 
 
Contingent consideration liability
 
$
242

 
$

 
$
242

 
$

 
 
 
 
Fair Value Measurement at Reporting Date Using
Description
 
December 31,
2015
 
Quoted Prices in Active Markets for Identical Assets
(Level 1)
 
Significant Other Observable Inputs
(Level 2)
 
Significant Unobservable Inputs
(Level 3 
Cash equivalents:
 
 
 
 
 
 
 
 
Money market funds
 
$
2,409

 
$
2,409

 
$

 
$

U.S. government securities
 
597

 
597

 

 

U.S. government agency securities
 
145

 
145

 

 

Corporate debt securities
 
53

 

 
53

 

Marketable securities:
 

 
 
 
 
 
 
U.S. government securities
 
5,948

 
5,948

 

 

U.S. government agency securities
 
4,475

 
4,475

 

 

Corporate debt securities
 
3,104

 

 
3,104

 

Total cash equivalents and marketable securities
 
$
16,731

 
$
13,574

 
$
3,157

 
$

 
 
 
 
 
 
 
 
 
Other liabilities:
 
 
 
 
 
 
 
 
Contingent consideration liability
 
$
260

 
$

 
$

 
$
260


We classify our cash equivalents and marketable securities within Level 1 or Level 2 because we use quoted market prices or alternative pricing sources and models utilizing market observable inputs to determine their fair value.
The performance milestones related to our contingent consideration liability were completed in the second quarter of 2016. Therefore, we no longer have to estimate the fair value of our contingent consideration liability based on the present value of probability-weighted future cash flows which are unobservable inputs that are not supported by market activity. As such, we reclassified our contingent consideration liability from Level 3 to Level 2 in 2016. During the year ended December 31, 2016, we recognized an increase in the fair value of our contingent liability of $66 million in research and development expense in our consolidated statements of income, mostly due to an increase in the fair value of our common stock and the completion of the performance milestones described above. In addition, we settled a portion of the contingent liability in July 2016 and the remaining portion of the contingent liability was reclassified to accrued expenses and other current liabilities on our consolidated balance sheets as of December 31, 2016.
Property and Equipment
Property and Equipment
Property and Equipment
Property and equipment consists of the following (in millions):
 
December 31,
 
2016
 
2015
Land
$
696

 
$
596

Buildings
3,109

 
2,273

Leasehold improvements
531

 
447

Network equipment
5,179

 
3,633

Computer software, office equipment and other
398

 
248

Construction in progress
1,890

 
622

Total
11,803

 
7,819

Less: Accumulated depreciation
(3,212
)
 
(2,132
)
Property and equipment, net
$
8,591

 
$
5,687

 
Depreciation expense on property and equipment was $1.59 billion, $1.22 billion, and $923 million during 2016, 2015, and 2014, respectively.
Property and equipment as of December 31, 2016 and 2015 includes $283 million and $287 million, respectively, acquired under capital lease agreements, of which a substantial majority, is included in network equipment. Accumulated depreciation of property and equipment acquired under these capital leases was $30 million and $71 million at December 31, 2016 and 2015, respectively.
Construction in progress includes costs mostly related to construction of data centers, network equipment infrastructure to support our data centers around the world, and office buildings. The construction of office buildings includes leased office spaces for which we are considered to be the owner for accounting purposes. See Note 9 in these notes to the consolidated financial statements for additional information. No interest was capitalized during the years ended December 31, 2016, 2015 and 2014.
Goodwill and Intangible Assets
Goodwill and Intangible Assets
Goodwill and Intangible Assets
During the year ended December 31, 2016, we completed several business acquisitions that were not material to our consolidated financial statements, either individually or in the aggregate. Accordingly, pro forma historical results of operations related to these business acquisitions during the year ended December 31, 2016 have not been presented. We have included the financial results of these business acquisitions in our consolidated financial statements from their respective dates of acquisition.
Goodwill generated from all business acquisitions completed during the year ended December 31, 2016 was primarily attributable to expected synergies from future growth and potential monetization opportunities. The amount of goodwill generated during this period that was deductible for tax purposes was not material.
The changes in the carrying amount of goodwill for the years ended December 31, 2016 and 2015 are as follows (in millions):
Balance as of December 31, 2014
$
17,981

Goodwill acquired
45

Balance as of December 31, 2015
$
18,026

Goodwill acquired
95

Effect of currency translation adjustment
1

Balance as of December 31, 2016
$
18,122


Intangible assets consist of the following (in millions):
 
 
 
December 31, 2016
 
December 31, 2015
 
Weighted-Average Remaining Useful Lives (in years)
 
Gross Carrying Amount
 
Accumulated Amortization
 
Net Carrying Amount
 
Gross Carrying Amount
 
Accumulated Amortization
 
Net Carrying Amount
Finite-lived intangible assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
Acquired users
4.8
 
$
2,056

 
$
(678
)
 
$
1,378

 
$
2,056

 
$
(382
)
 
$
1,674

Acquired technology
2.4
 
931

 
(518
)
 
413

 
831

 
(310
)
 
521

Acquired patents
5.9
 
785

 
(420
)
 
365

 
785

 
(333
)
 
452

Trade names
3.2
 
629

 
(293
)
 
336

 
629

 
(163
)
 
466

Other
3.3
 
162

 
(119
)
 
43

 
162

 
(89
)
 
73

Total finite-lived intangible assets
4.3
 
$
4,563

 
$
(2,028
)
 
$
2,535

 
$
4,463

 
$
(1,277
)
 
$
3,186

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Indefinite-lived intangible assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
In-process research and development (IPR&D)
 
 
$

 
$

 
$

 
$
60

 
$

 
$
60

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total intangible assets
 
 
$
4,563

 
$
(2,028
)
 
$
2,535

 
$
4,523

 
$
(1,277
)
 
$
3,246

 
We completed the IPR&D and reclassified it from indefinite-lived intangible asset to acquired technology in March 2016. We also began amortizing the balance over its estimated useful life.
Amortization expense of intangible assets for the years ended December 31, 2016, 2015, and 2014 was $751 million, $730 million, and $319 million, respectively.
As of December 31, 2016, expected amortization expense for the unamortized acquired intangible assets for the next five years and thereafter is as follows (in millions):
2017
$
687

2018
619

2019
526

2020
357

2021
265

Thereafter
81

Total
$
2,535

Liabilities
Liabilities
Liabilities
The components of accrued expenses and other current liabilities are as follows (in millions):
 
December 31,
 
2016
 
2015
Accrued compensation and benefits
$
636

 
$
473

Accrued property and equipment
331

 
192

Promissory note payable

 
201

Contingent consideration liability
242

 

Other current liabilities
994

 
583

Accrued expenses and other current liabilities
$
2,203

 
$
1,449



The components of other liabilities are as follows (in millions):
 
December 31,
 
2016
 
2015
Income tax payable
$
2,431

 
$
2,458

Contingent consideration liability

 
267

Other liabilities
461

 
432

Other liabilities
$
2,892

 
$
3,157

Long-term Debt
Long-term Debt
Long-term Debt
In May 2016, we terminated our undrawn five-year senior unsecured revolving credit facility that allowed us to borrow up to $6.5 billion and entered into a $2.0 billion senior unsecured revolving credit facility (2016 Facility). Any amounts outstanding under the 2016 Facility will be due and payable on May 20, 2021. As of December 31, 2016, no amounts had been drawn down and we were in compliance with the covenants under the 2016 Facility.
Commitments and Contingencies
Commitments and Contingencies
Commitments and Contingencies
Commitments
Leases
We have entered into various non-cancelable operating lease agreements for certain of our offices, land, facilities, and data centers with original lease periods expiring between 2017 and 2037. We are committed to pay a portion of the related actual operating expenses under certain of these lease agreements. Certain of these arrangements have free rent periods or escalating rent payment provisions, and we recognize rent expense under such arrangements on a straight-line basis.
The following is a schedule, by years, of the future minimum lease payments required under non-cancelable operating leases as of December 31, 2016 (in millions):
 
Operating Leases
 
Financing obligation, building in progress - leased facilities(1)
2017
$
277

 
$

2018
284

 

2019
265

 
7

2020
221

 
35

2021
184

 
36

Thereafter
733

 
398

Total minimum lease payments
$
1,964

 
$
476


(1)
We entered into agreements to lease office buildings that are under construction. As a result of our involvement during these construction periods, we are considered for accounting purposes to be the owner of the construction projects. The above financing obligation, building in progress - leased facilities represent the total expected financing and lease obligations associated with these leases and will be settled through monthly lease payments to the landlords when we occupy the office spaces upon completion. This amount includes $112 million that is included in property and equipment, net and other liabilities on our consolidated balance sheets as of December 31, 2016.
Operating lease expense was $269 million, $196 million, and $135 million for the years ended December 31, 2016, 2015 and 2014, respectively. We fully repaid all our capital lease obligations during 2016.
Other contractual commitments
We also have $1.24 billion of non-cancelable contractual commitments as of December 31, 2016, primarily related to network infrastructure and our data center operations. These commitments are primarily due within five years.
Contingencies
Legal Matters
Beginning on May 22, 2012, multiple putative class actions, derivative actions, and individual actions were filed in state and federal courts in the United States and in other jurisdictions against us, our directors, and/or certain of our officers alleging violation of securities laws or breach of fiduciary duties in connection with our initial public offering (IPO) and seeking unspecified damages. We believe these lawsuits are without merit, and we intend to continue to vigorously defend them. The vast majority of the cases in the United States, along with multiple cases filed against The NASDAQ OMX Group, Inc. and The Nasdaq Stock Market LLC (collectively referred to herein as NASDAQ) alleging technical and other trading-related errors by NASDAQ in connection with our IPO, were ordered centralized for coordinated or consolidated pre-trial proceedings in the U.S. District Court for the Southern District of New York. In a series of rulings in 2013 and 2014, the court denied our motion to dismiss the consolidated securities class action and granted our motions to dismiss the derivative actions against our directors and certain of our officers. On July 24, 2015, the court of appeals affirmed the dismissal of the derivative actions. On December 11, 2015, the court granted plaintiffs' motion for class certification in the consolidated securities action. In addition, the events surrounding our IPO became the subject of various state and federal government inquiries. In May 2014, the Securities and Exchange Commission (SEC) notified us that it had terminated its inquiry and that no enforcement action had been recommended by the SEC.
On April 27, 2016, we announced a proposal to create a new class of non-voting capital stock (Class C capital stock) and our intention to declare and pay a dividend of two shares of Class C capital stock for each outstanding share of Class A and Class B common stock (the Reclassification). Following our announcement of the Reclassification, beginning on April 29, 2016, multiple purported class action lawsuits were filed on behalf of our stockholders in the Delaware Court of Chancery against us, certain of our board of directors, and Mark Zuckerberg. The lawsuits have been consolidated under the caption In re Facebook, Inc. Class C Reclassification Litig., C.A. No. 12286-VCL, and the consolidated complaint generally alleges that the defendants breached their fiduciary duties in connection with the Reclassification. Among other remedies, these lawsuits seek to enjoin the Reclassification as well as unspecified money damages, costs, and attorneys’ fees. We believe that the lawsuits are without merit and intend to vigorously defend against all claims asserted.
We are also party to various legal proceedings and claims that arise in the ordinary course of business. Among these matters, the ZeniMax Media Inc. v. Oculus VR Inc. trial was held in January 2017 in the U.S. District Court for the Northern District of Texas. In the ZeniMax case, the plaintiff asserted a number of claims, against us and certain individuals, including trade secret misappropriation, copyright infringement, breach of contract, tortious interference with contract, unfair competition, unjust enrichment, trademark infringement, and false designation. The plaintiff was seeking actual damages of up to $2.0 billion, punitive damages of up to $4.0 billion, and equitable relief, including an injunction. On February 1, 2017, the jury reached a verdict in favor of the plaintiff on claims related to copyright infringement, breach of contract, trademark infringement and false designation, and found for the defendants on all other claims. The amount of damages awarded by the jury was $500 million in the aggregate. We believe we have multiple grounds to appeal this result and intend to vigorously pursue such appeals. The result of the verdict, in light of appeals and net of contractual indemnity rights, was not material to our financial results.
With respect to our other outstanding legal matters, we believe that the amount or estimable range of reasonably possible loss will not, either individually or in the aggregate, have a material adverse effect on our business, consolidated financial position, results of operations, or cash flows. However, the outcome of litigation is inherently uncertain. Therefore, if one or more of these legal matters were resolved against us for amounts in excess of management's expectations, our results of operations and financial condition, including in a particular reporting period, could be materially adversely affected.
Indemnifications
In the normal course of business, to facilitate transactions of services and products, we have agreed to indemnify certain parties 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 by third parties. These agreements may 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, directors, and certain employees, and our certificate of incorporation and bylaws contain similar indemnification obligations.
It is not possible to determine the maximum potential amount under these indemnification agreements due to the limited history of prior indemnification claims and the unique facts and circumstances involved in each particular agreement. Historically, payments made by us under these agreements have not had a material impact on our consolidated financial position, results of operations or cash flows. In our opinion, as of December 31, 2016, there was not at least a reasonable possibility we had incurred a material loss with respect to indemnification of such parties. We have not recorded any liability for costs related to indemnification through December 31, 2016.
Stockholders' Equity
Stockholders' Equity
Stockholders' Equity
Common Stock
Our certificate of incorporation authorizes the issuance of Class A common stock and Class B common stock. As of December 31, 2016, we are authorized to issue 5,000 million shares of Class A common stock and 4,141 million shares of Class B common stock, each with a par value of $0.000006 per share. Holders of our Class A common stock and Class B common stock are entitled to dividends when, as and if, declared by our board of directors, subject to the rights of the holders of all classes of stock outstanding having priority rights to dividends. As of December 31, 2016, we did not declare any dividends and our credit facility contains restrictions on our ability to pay dividends. The holder of each share of Class A common stock is entitled to one vote, while the holder of each share of Class B common stock is entitled to ten votes. Shares of our Class B common stock are convertible into an equivalent number of shares of our Class A common stock and generally convert into shares of our Class A common stock upon transfer. Class A common stock and Class B common stock are referred to as common stock throughout the notes to these financial statements, unless otherwise noted.
As of December 31, 2016, there were 2,354 million shares and 538 million shares of Class A common stock and Class B common stock, respectively, issued and outstanding.
Reclassification
In April 2016, our board of directors approved the Reclassification by approving amendments to our restated certificate of incorporation (the New Certificate) that would, among other things, create non-voting Class C capital stock. The Class C capital stock will have the same rights and powers, rank equally (including as to dividends and distributions, mergers or similar business combinations, and in connection with any liquidation, dissolution or winding up of the corporation), share ratably and be identical in all other respects and as to all matters to the shares of Class A and Class B common stock, except for voting rights and as expressly provided in the New Certificate. The New Certificate was approved by our stockholders on June 20, 2016. As of December 31, 2016, the New Certificate was not yet effective.
As part of the Reclassification, we announced that our board of directors intends to issue two shares of the Class C capital stock as a one-time stock dividend for each share of Class A and Class B common stock outstanding. The record and payment dates for this dividend will be determined by our board of directors in its discretion and there can be no assurance as to the timing of such dates. For accounting purposes, we expect this dividend will be treated as a stock split in the form of a dividend.
Share Repurchase Program
In November 2016, our board of directors authorized a $6.0 billion share repurchase program of our Class A common stock, beginning in 2017 and which does not have an expiration date. The timing and actual number of shares repurchased depend on a variety of factors, including price, general business and market conditions, and other investment opportunities, through open market purchases or privately negotiated transactions, including through the use of trading plans intended to qualify under Rule 10b5-1 under the Exchange Act.
Share-based Compensation Plans
We maintain two share-based employee compensation plans: the 2012 Equity Incentive Plan (2012 Plan) and the 2005 Stock Plan (collectively, Stock Plans). Our 2012 Plan serves as the successor to our 2005 Stock Plan and provides for the issuance of incentive and nonstatutory stock options, restricted stock awards, stock appreciation rights, RSUs, performance shares, and stock bonuses to qualified employees, directors and consultants. Outstanding awards under the 2005 Stock Plan continue to be subject to the terms and conditions of the 2005 Stock Plan. Our board of directors approved the amendment and restatement of our 2012 Plan (the Amended 2012 Plan), which was approved by our stockholders and adopted by us in June 2016.
We initially reserved 25 million shares of our Class A common stock for issuance under our 2012 Plan. Following the date of the stock dividend described above, if it is declared and paid, the shares reserved and available for issuance under our Amended 2012 Plan will be shares of the new Class C Capital Stock, except for shares reserved for awards outstanding immediately prior to the payment of the dividend. The number of shares reserved for issuance under our Amended 2012 Plan increases automatically on January 1 of each of the calendar years during the term of the Amended 2012 Plan, which will continue through and including April 2026 unless terminated earlier by our board of directors or a committee thereof, by a number of shares of Class C capital stock (and prior to the date of the payment of the stock dividend described above, Class A common stock) equal to the lesser of (i) 2.5% of the total issued and outstanding shares of our Class A common stock and Class C capital stock as of the immediately preceding December 31st or (ii) a number of shares determined by our board of directors. Our board of directors elected not to increase the number of shares reserved for issuance in 2016 and 2015.
In addition, shares available for grant under the 2005 Stock Plan, which were reserved but not issued, forfeited or repurchased at their original issue price, or subject to outstanding awards under the 2005 Stock Plan as of the effective date of our IPO, were added to the reserves of the Amended 2012 Plan and shares that are withheld in connection with the net settlement of RSUs are also added to the reserves of the Amended 2012 Plan.
In connection with an acquisition in 2014, we granted inducement awards covering an aggregate of 37 million RSUs earned over a service period of four years. These awards are excluded from the Stock Plans and are subject to the terms, restrictions, and conditions of separate non-plan RSU award agreements.
The following table summarizes the activities of stock option awards under the Stock Plans for the year ended December 31, 2016:
 
Shares Subject to Options Outstanding
 
Number of Shares
 
Weighted Average Exercise Price
 
Weighted Average Remaining Contractual Term
 
Aggregate Intrinsic Value(1)
 
(in thousands)
 
 
 
(in years)
 
(in millions)
Balance as of December 31, 2015
8,443

 
$
7.10

 
 
 
 
Stock options exercised
(2,756
)
 
5.70

 
 
 
 
Balance as of December 31, 2016
5,687

 
$
7.78

 
2.9
 
$
610

Stock options exercisable as of December 31, 2016
4,433

 
$
6.05

 
2.6
 
$
483

 
(1)
The aggregate intrinsic value is calculated as the difference between the exercise price of the underlying stock option awards and the official closing price of our Class A common stock of $115.05, as reported on the NASDAQ Global Select Market on December 31, 2016.
There were no options granted, forfeited, or canceled for the year ended December 31, 2016. The aggregate intrinsic value of the options exercised in the years ended December 31, 2016, 2015, and 2014 was $309 million, $403 million, and $624 million, respectively. The total grant date fair value of stock options vested during the years ended December 31, 2016, 2015, and 2014 was $5 million, $5 million, and $7 million, respectively.
The following table summarizes additional information regarding outstanding and exercisable options under the Stock Plans at December 31, 2016:
 
 
Options Outstanding 
 
Options Exercisable 
Exercise Price (Range) 
 
Number of Shares
 
Weighted Average Remaining
Contractual Term
 
Weighted Average Exercise Price 
 
Number of Shares 
 
Weighted Average Exercise Price 
 
 
(in thousands)
 
(in years)
 
 
 
(in thousands)
 
 
0.29 - 0.33
 
729
 
0.4
 
$
0.32

 
729

 
$
0.32

1.85
 
526
 
2.0
 
1.85

 
526

 
1.85

2.95
 
1,147
 
2.6
 
2.95

 
1,147

 
2.95

10.39
 
2,085
 
3.6
 
10.39

 
1,793

 
10.39

15.00
 
1,200
 
3.8
 
15.00

 
238

 
15.00

 
 
5,687
 
2.9
 
$
7.78

 
4,433

 
$
6.05


The following table summarizes the activities for our unvested RSUs for the year ended December 31, 2016:
 
Unvested RSUs(1)
 
Number of Shares
 
Weighted Average Grant Date Fair Value
 
(in thousands)
 
 
Unvested at December 31, 2015
116,409

 
$
65.95

Granted
30,414

 
113.43

Vested
(43,154
)
 
59.30

Forfeited
(5,083
)
 
75.97

Unvested at December 31, 2016
98,586

 
$
82.99


(1)
Unvested shares include inducement awards issued in connection with an acquisition in 2014 and are subject to the terms, restrictions, and conditions of separate non-plan RSU award agreements.
The fair value as of the respective vesting dates of RSUs that vested during the years ended December 31, 2016, 2015, and 2014 was $4.92 billion, $4.23 billion, and $2.77 billion, respectively.
As of December 31, 2016, there was $7.03 billion of unrecognized share-based compensation expense, of which (i) $6.78 billion was related to RSUs, and (ii) $255 million was related to restricted shares, shares related to our contingent consideration with performance conditions that were met in the second quarter of 2016 but are still subject to service condition, and stock options. This unrecognized compensation expense is expected to be recognized over a weighted-average period of approximately three years.
Interest and other income/(expense), net
Interest and other income/(expense), net
Interest and other income/(expense), net
The following table presents the detail of interest and other income/(expense), net, for the periods presented (in millions):
 
Year Ended December 31,
 
2016
 
2015
 
2014
Interest expense
$
(10
)
 
$
(23
)
 
$
(23
)
Interest income
176

 
52

 
27

Foreign currency exchange losses, net
(76
)
 
(66
)
 
(87
)
Other
1

 
6

 
(1
)
Interest and other income/(expense), net
$
91

 
$
(31
)
 
$
(84
)
Income Taxes
Income Taxes
Income Taxes
The components of income before provision for income taxes for the years ended December 31, 2016, 2015, and 2014 are as follows (in millions):
 
Year Ended December 31, 
 
2016
 
2015
 
2014
Domestic
$
6,368

 
$
2,802

 
$
4,918

Foreign
6,150

 
3,392

 
(8
)
Income before provision for income taxes
$
12,518

 
$
6,194

 
$
4,910


The provision for income taxes consisted of the following (in millions):
 
Year Ended December 31, 
 
2016
 
2015
 
2014
Current:
 
 
 
 
 
Federal
$
2,384

 
$
3,012

 
$
1,999

State
179

 
183

 
130

Foreign
195

 
123

 
96

Total current tax expense
2,758

 
3,318

 
2,225

Deferred:
 
 
 
 
 
Federal
(414
)
 
(800
)
 
(240
)
State
(18
)
 
(17
)
 
(14
)
Foreign
(25
)
 
5

 
(1
)
Total deferred tax benefit
(457
)
 
(812
)
 
(255
)
Provision for income taxes
$
2,301

 
$
2,506

 
$
1,970

 
A reconciliation of the U.S. federal statutory income tax rate of 35.0% to our effective tax rate is as follows (in percentages):
 
Year Ended December 31, 
 
2016
 
2015
 
2014
U.S. federal statutory income tax rate
35.0
 %
 
35.0
 %
 
35.0
 %
State income taxes, net of federal benefit
1.0

 
2.0

 
1.4

Research tax credits
(0.7
)
 
(1.4
)
 
(1.1
)
Share-based compensation
1.0

 
2.2

 
6.5

Excess tax benefits related to share-based compensation(1)
(7.0
)
 

 

Effect of non-U.S. operations
(12.8
)
 
(0.9