Google Impairments PROCESS RE-ENGINEERING WITH MOODY'S CREDITEDGE+ - PowerPoint PPT Presentation

Google Impairments PROCESS RE-ENGINEERING WITH MOODY'S CREDITEDGE+ Treasury Today : Adam Smith Solution Award Winner : 2012 Treasury & Risk : Hamilton Award Honorable Mention : 2012 JOE STANFILL SENIOR ENGINEER, GOOGLE BUSINESS APPLICATIONS Google Confidential and Proprietary

A Bit of Background and Context to Start About Myself • PricewaterhouseCoopers, New York, NY : Senior Associate, [ Audit Practice] , Investment Management Services, 4 years • o Google, Inc., Mountain View, CA : Senior Engineer, [ Business Applications Group] , Special Projects, 3 years • o Subject matter proficiencies : US GAAP, IFRS, Financial Products, System Integration, Process Re-Engineering o About Google Treasury • Manages $51 billion in cash and investments and has experienced high double-digit, year-on-year growth since the company's founding in 1998 • A very small team of accountants manage all valuation, bookkeeping, and financial reporting processes for the 50+ investment and cash funds • Google's "Lean teams" pivot on 2 key needs to stay ahead of its rapid growth : Good quality data o Stable process automation o Google Confidential and Proprietary

On FASB Regulatory Guidance and the Google Portfolio SFAS 1 1 5 ( ASC 3 2 0 ) in a Nutshell • “For individual securities classified as either available-for-sale or held-to-maturity, an enterprise shall determine whether a decline in fair value below the amortized cost basis is other than tem porary .” • Translation : Quarterly reviews and reporting of bond valuation should identify and account for unrealized losses during the period which exhibit evidence of ; (1) a credit component o (2) a potential to be "Other-than-Temporary", or persistent and lasting o • The guidance leaves significant daylight for professional judgment, individualized review processes, and assessments of what constitutes "Other-than-Temporary" The I m pact for Google Treasury • The Treasury investment portfolio is growing in AUM and complexity • SCOPE : ~ $11 billion AUM : Emerging Market, IG, and High-Yield bond funds • Accounting and SEC Reporting specialists requested a way to comprehensively; Separate losses due to normal interest rate fluctuation and credit events, o Deliver a shortlist of "impairment candidates" for final review and adjustment, o If possible, provide a reasonable, quantitative construct we could unequivocally o justify to our SEC auditor Google Confidential and Proprietary

Moody's' Estimated Default Frequency Framework A Brief History of the Fram ew ork • Decem ber 2 0 1 0 : Informal RFP discussed with Moody's Analytics • January 2 0 1 1 : Proposal to Google by 2 of its PhD credit and accounting researchers • March 2 0 1 2 : Solution goes "live" into production and delivers clean outputs to users • July 2 0 1 2 : Solution wins category award from Treasury Today (" Adam Smith Award" ) Fram ew ork Process Synopsis • Utilizes Moody's credit data universe and credit analytics engine, CreditEdge+ • CE+ consumes security indicative data from Google's custody and accounting agent • Maps to Moody's internal identifiers at the issuer level and returns 3 key metrics, by issuer, which evaluate credit profile change and other credit events during the period; EDF : Estimated default frequency, driven by underlying equity o SI EDF : Spread-implied EDF, driven by credit default spreads o Bond-I m plied PD : Probability of default, driven by industry comparables o  Collectively dubbed, "The EDF Framework" • Google Engineering algorithm, developed by our capital markets and risk specialists, consume the EDF outputs and enrich with historical and other proprietary data • Coming soon : Year-end audit testing automation algorithm Google Confidential and Proprietary

Google Confidential and Proprietary

A Fully Productionalized Process Sum m ary Enhancem ents • Fully automated, one-click process replaces highly manual predecessor • Once able to review only 200-300 flagged securities, Treasury is now able to comprehensively evaluate all non-government and agency-backed securities (totalling ~ 4,200 individual holdings) • Saves Google Treasury an average of 12-15 man-hours per quarter-end close Additional Enhancem ents • Combines 2, methodologically-rigorous evaluation mechanics - "The Moody's Framework" and the Google Risk Algorithm - with Moody's high-quality credit data universe to greatly enrich Google professionals' analysis and judgment • Provides enhanced reporting visibility with monthly and twice-quarterly reporting and the additional option to run ad-hoc/ by-request reports, which reduces intra- quarter risk of unobserved credit impacts to portfolio value • Allows Accounting users to run historical reporting and analytics on any previous reports and maintain a "watch-list" that flags previous offenders for future review Google Confidential and Proprietary

Challenges & Acknowledgements Challenges to I m plem entation • To our knowledge, impairments have not been enhanced in this way before • Complex and changing business requirements allowed for frequent "scope creep" • Technologically challenging ; moving/ arranging data, building useable reporting • Challenges for agreeing on language and concept in legal terminology • Google occasionally requires.... patience. Moody's Client Service & Support • In a word ; "Textbook" may not do justice to Moody's Analytics and Research • • And that’s not just lip-service… The Framework is a rich, innovative, and integratable accomplishment • Moody’s Sales, Relationship Management, and SME consultation were ever-available • All groups synchronized and open-minded about and with Google's requirements • Devout about decisions which benefitted the end product, not Google's client-ego Perhaps most importantly, Moody's support didn't end with a signed contract. Special Thanks to Yanruo Wang, Shisheng Qu, Alok Jain, Kelly Smith, Vladimir Aganajov, and Prarthna Kapur. It was truly a pleasure to work with you. Google Confidential and Proprietary

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