6-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 6-K

REPORT OF FOREIGN PRIVATE ISSUER

PURSUANT TO RULE 13a-16 OR 15d-16

UNDER THE SECURITIES EXCHANGE ACT OF 1934

For the month of December 2020

Commission File Number: 001-38431

iQIYI, Inc.

9/F, iQIYI Innovation Building

No. 2 Haidian North First Street, Haidian District, Beijing 100080

People’s Republic of China

Tel: +86 10 6267-7171

(Address of principal executive offices)

Indicate by check mark whether the registrant files or will file annual reports under cover of Form 20-F or Form 40-F.

Form 20-F  ☒                Form

40-F  ☐

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1):  ☐

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(7):  ☐

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

iQIYI, Inc.
By:	/s/ Xiaodong Wang
Name:	Xiaodong Wang
Title:	Chief Financial Officer

Date: December 15, 2020

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Exhibit Index

Exhibit No.	Description
99.1	Unaudited Interim Condensed Consolidated Financial Statements
101.INS	Inline XBRL Instance Document—this instance document does not appear in the Interactive Data File because its XBRL tags are not embedded within the Inline XBRL document
101.SCH	Inline XBRL Taxonomy Extension Schema Document
101.CAL	Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF	Inline XBRL Taxonomy Extension Definition Linkbase Document
101.LAB	Inline XBRL Taxonomy Extension Label Linkbase Document
101.PRE	Inline XBRL Taxonomy Extension Presentation Linkbase Document
104	Cover Page Interactive Data File (embedded within the Inline XBRL document)

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EX-99.1

Exhibit 99.1

iQIYI, INC.

CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 2019 AND

UNAUDITED INTERIM CONDENSED CONSOLIDATED BALANCE SHEET AS OF SEPTEMBER 30, 2020

(Amounts in thousands of Renminbi (“RMB”) and U.S. Dollars (“US$”),

except for number of shares and per share data)

		As of
		December 31,<br> 2019		September 30,<br> 2020		September 30, 2020
		RMB		RMB		US
				(Unaudited)		(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents			5,934,742		3,163,128
Restricted cash			974,932		655,653
Short-term investments			4,579,313		3,603,891
Accounts receivable, net of allowance of RMB144,574 and RMB370,027 (US54,499) as of December 31, 2019 and September 30, 2020, respectively			3,627,749		3,260,191
Prepayments and other assets			3,719,228		3,463,425
Amounts due from related parties	14		211,993		169,799
Licensed copyrights, net	5		1,224,881		1,247,415
Total current assets			20,272,838		15,563,502
Non-current assets:
Fixed assets, net			1,754,367		1,463,733
Long-term investments	4		2,982,154		3,710,782
Deferred tax assets, net			34,916		66,673
Licensed copyrights, net	5		6,287,330		6,061,511
Intangible assets, net			813,960		661,683
Produced content, net	6		4,355,221		5,517,095
Prepayments and other assets			3,508,476		2,711,235
Operating lease assets			722,742		1,001,648
Goodwill			3,888,346		3,888,346
Amounts due from related parties	14		172,200		242,000
Total non-current assets			24,519,712		25,324,706
Total assets			44,792,550		40,888,208
LIABILITIES, MEZZANINE EQUITY AND SHAREHOLDERS’ DEFICIT
Current liabilities (including current liabilities of the consolidated VIEs without recourse to the primary beneficiary of RMB12,093,465 and RMB11,646,729 (US1,715,378) as of December 31, 2019 and September 30, 2020, respectively):
Accounts and notes payable			8,212,449		7,455,954
Amounts due to related parties	14		1,604,258		1,828,085
Customer advances and deferred revenue			3,081,407		3,064,785
Short-term loans	7		2,618,170		3,804,396
Long-term loans, current portion	7		736,814		733,365
Operating lease liabilities, current portion			125,412		197,673
Accrued expenses			2,611,217		2,162,980
Other liabilities			1,183,439		1,256,218
Total current liabilities			20,173,166		20,503,456

All values are in US Dollars.

F-1

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iQIYI, INC.

CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 2019 AND

UNAUDITED INTERIM CONDENSED CONSOLIDATED BALANCE SHEET AS OF SEPTEMBER 30, 2020 (Continued)

(Amounts in thousands of Renminbi (“RMB”) and U.S. Dollars (“US$”),

except for number of shares and per share data)

		As of
		December 31,<br> 2019			September 30,<br> 2020			September 30, 2020
		RMB			RMB			US
					(Unaudited)			(Unaudited)
Non-current liabilities (including non-current liabilities of the consolidated VIEs without recourse to the primary beneficiary of RMB1,932,830 and RMB 1,812,912 (US267,013) as of December 31, 2019 and September 30, 2020, respectively):
Long-term loans	7		880,278			628,286
Convertible senior notes	8		12,296,868			12,307,243
Deferred tax liabilities			30,136			13,749
Amounts due to related parties	14		1,061,883			993,608
Operating lease liabilities			402,732			757,882
Other non-current liabilities			232,555			207,071
Total non-current liabilities			14,904,452			14,907,839
Total liabilities			35,077,618			35,411,295
Commitments and contingencies	10
Mezzanine equity
Redeemable noncontrolling interests	11		101,542			106,802
Shareholders’ equity:
Class A ordinary shares (US0.00001 par value; 94,000,000,000 shares authorized as of December 31, 2019 and September 30, 2020, respectively; 2,603,890,438 and 2,617,771,642 shares issued as of December 31, 2019 and September 30, 2020, respectively; 2,259,125,125 and 2,318,853,056 shares outstanding as of December 31, 2019 and September 30, 2020, respectively)			142			146
Class B ordinary shares (US0.00001 par value; 5,000,000,000 and 5,000,000,000 shares authorized as of December 31, 2019 and September 30, 2020, respectively; 2,876,391,396 and 2,876,391,396 shares issued and outstanding as of December 31, 2019 and September 30, 2020, respectively)			183			183
Additional paid-in capital			41,298,328			42,464,474
Accumulated deficit			(33,834,357	)		(39,424,412	)		)
Accumulated other comprehensive income	16		2,106,718			2,274,276
Noncontrolling interests			42,376			55,444
Total shareholders’ equity			9,613,390			5,370,111
Total liabilities, mezzanine equity and shareholders’ equity			44,792,550			40,888,208

All values are in US Dollars.

The accompanying notes are an integral part of the unaudited interim condensed consolidated financial statements.

F-2

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iQIYI, INC.

UNAUDITED INTERIM CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2019 AND 2020

(Amounts in thousands of Renminbi (“RMB”) and U.S. Dollars (“US$”),

except for number of shares and per share data)

	Nine months ended September 30
	2019			2020			2020
	RMB			RMB			US
	(Unaudited)			(Unaudited)			(Unaudited)
Revenues:
Membership services (including related party amounts of RMB22,098 and RMB12,640 (US1,862) for the nine months ended September 30, 2019 and 2020, respectively)		10,574,553			12,655,829
Online advertising services (including related party amounts of RMB51,635 and RMB153,725 (US22,642) for the nine months ended September 30, 2019 and 2020, respectively)		6,387,500			4,963,084
Content distribution (including related party amounts of RMB389,990 and RMB137,597 (US20,266) for the nine months ended September 30, 2019 and 2020, respectively)		1,666,177			1,855,739
Others (including related party amounts of RMB38,968 and RMB41,995 (US6,185) for the nine months ended September 30, 2019 and 2020, respectively)		2,868,804			2,774,383
Total revenues		21,497,034			22,249,035
Operating costs and expenses:
Cost of revenues (including related party amounts of RMB965,944 and RMB827,884 (US121,935) for the nine months ended September 30, 2019 and 2020, respectively)		(22,433,904	)		(21,099,888	)		)
Selling, general and administrative (including related party amounts of RMB2,482 and RMB17,133 (US2,524) for the nine months ended September 30, 2019 and 2020, respectively)		(3,836,478	)		(3,870,170	)		)
Research and development (including related party amounts of RMB12,085 and RMB7,381 (US1,087) for the nine months ended September 30, 2019 and 2020, respectively)		(1,955,884	)		(2,012,113	)		)
Total operating costs and expenses		(28,226,266	)		(26,982,171	)		)
Operating loss		(6,729,232	)		(4,733,136	)		)
Other income/(expense):
Interest income (including related party amounts of RMB3,596 and RMB1,247 (US184) for the nine months ended September 30, 2019 and 2020, respectively)		312,312			135,068
Interest expenses (including related party amounts of RMB nil and RMB nil (US nil) for the nine months ended September 30, 2019 and 2020, respectively)		(637,444	)		(796,997	)		)
Foreign exchange (loss)/gain, net		(634,187	)		14,349
Loss from equity method investments		(105,860	)		(183,792	)		)
Other income, net		22,847			129,039
Total other expenses, net		(1,042,332	)		(702,333	)		)

All values are in US Dollars.

F-3

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iQIYI, INC.

UNAUDITED INTERIM CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2019 AND 2020 (Continued)

(Amounts in thousands of Renminbi (“RMB”) and U.S. Dollars (“US$”),

except for number of shares and per share data)

		Nine months ended September 30
	Note	2019			2020			2020
		RMB			RMB			US
		(Unaudited)			(Unaudited)			(Unaudited)
Loss before income taxes			(7,771,564	)		(5,435,469	)		)
Income tax expense	9		(29,266	)		(39,613	)		)
Net loss			(7,800,830	)		(5,475,082	)		)
Less: Net income attributable to noncontrolling interests			28,714			15,665
Net loss attributable to iQIYI, Inc.			(7,829,544	)		(5,490,747	)		)
Accretion of redeemable noncontrolling interests			—			(5,260	)		)
Net loss attributable to ordinary shareholders.			(7,829,544	)		(5,496,007	)		)
Net loss per Class A and Class B ordinary share:	13
Basic			(1.54	)		(1.07	)		)
Diluted			(1.54	)		(1.07	)		)
Net loss per ADS (1 ADS equals 7 Class A ordinary shares):	13
Basic			(10.78	)		(7.49	)		)
Diluted			(10.78	)		(7.49	)		)
Shares used in net loss per Class A and Class B ordinary share computation:	13
Basic			5,098,456,394			5,157,297,932
Diluted			5,098,456,394			5,157,297,932
Other comprehensive income
Foreign currency translation adjustments			613,424			166,781
Unrealized losses on <br>available-for-sale<br> debt securities			(282	)		(315	)		)
Total other comprehensive income, net of tax			613,142			166,466
Comprehensive loss			(7,187,688	)		(5,308,616	)		)
Less: Comprehensive income attributable to noncontrolling interests			29,821			14,573
Comprehensive loss attributable to iQIYI, Inc.			(7,217,509	)		(5,323,189	)		)

All values are in US Dollars.

The accompanying notes are an integral part of the unaudited interim condensed consolidated financial statements.

F-4

iQIYI, INC.

UNAUDITED INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2019 AND 2020

(Amounts in thousands of Renminbi (“RMB”) and U.S. Dollars (“US$”),

except for number of shares and per share data)

	Nine months ended September 30
	2019			2020			2020
	RMB			RMB			US
	(Unaudited)			(Unaudited)			(Unaudited)
Cash flows from operating activities:
Net loss		(7,800,830	)		(5,475,082	)		)
Adjustments to reconcile net loss to net cash provided by operating activities
Depreciation of fixed assets		349,752			362,459
Amortization and impairment of intangible assets		419,919			271,935
Amortization and impairment of licensed copyrights		9,531,104			8,989,909
Amortization and impairment of produced content		2,324,085			3,492,657
Impairment of long-lived assets		—			143,534
Provision for credit losses		72,447			212,254
Unrealized foreign exchange loss/(gain)		625,126			(21,647	)		)
Loss/(gain) on disposal of fixed assets		3,193			(7,146	)		)
Accretion on convertible notes payable or convertible senior notes		241,107			324,136
Barter transaction revenue		(493,570	)		(957,675	)		)
Share-based compensation		769,527			1,021,116
Share of losses on equity method investments		105,860			183,792
Fair value change and impairment of long-term investments		21,024			35,099
Fair value change of assets and liabilities remeasured at fair value on a recurring basis		5,711			—
Other investment and interest income		(61,065	)		7,663
Deferred income tax benefit		(44,646	)		(48,144	)		)
Amortization of deferred income		(7,938	)		(10,658	)		)
Other <br>non-cash<br> expenses		29,869			60,637
Changes in operating assets and liabilities
Accounts receivable		(155,359	)		92,912
Amounts due from related parties		(55,226	)		(126,909	)		)
Licensed copyrights		—			(7,913,397	)		)
Produced content		(3,433,945	)		(4,654,531	)		)
Prepayments and other assets		(1,246,280	)		1,200,455
Accounts payable		(335,234	)		(617,958	)		)
Amounts due to related parties		344,642			(86,373	)		)
Customer advances and deferred revenue		154,321			(20,622	)		)
Accrued expenses and other current liabilities		183,107			(330,627	)		)
Other <br>non-current<br> liabilities		16,943			(19,413	)		)
Net cash provided by/(used for) operating activities		1,563,644			(3,891,624	)		)
Cash flows from investing activities:
Acquisition of fixed assets		(507,938	)		(214,227	)		)
Acquisition of intangible assets		(106,655	)		(131,320	)		)
Acquisition of licensed copyrights from related parties		(259,090	)		—
Acquisition of licensed copyrights from third parties		(8,042,120	)		—
Purchase of long-term investments		(409,941	)		(770,805	)		)
Proceeds from disposal of long-term investments		3,000			20,000
Acquisition of business, net of cash acquired		(5,798	)		(5,798	)		)
Film investment as passive investor		(3,250	)		—
Proceeds from film investments as passive investor		14,368			1,612
Loans provided to third parties		(24,000	)		(6,415	)		)
Repayment of loans provided to related parties		26,500			100,000
Purchases of <br>held-to-maturity<br> debt securities		(6,226,900	)		(2,181,603	)		)
Maturities of <br>held-to-maturity<br> debt securities		5,632,495			2,972,378
Purchases of <br>available-for-sale<br> debt securities		(11,081,887	)		(8,104,132	)		)

All values are in US Dollars.

F-5

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iQIYI, INC.

UNAUDITED INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2019 AND 2020 (Continued)

(Amounts in thousands of Renminbi (“RMB”) and U.S. Dollars (“US$”),

except for number of shares and per share data)

	Nine months ended September 30
	2019			2020			2020
	RMB			RMB			US
	(Unaudited)			(Unaudited)			(Unaudited)
Maturities of <br>available-for-sale<br> debt securities		11,330,555			8,190,405
Other investing activities		—			7,730
Net cash used for investing activities		(9,660,661	)		(122,175	)		)
Cash flows from financing activities:
Repayments of loans from related parties		(70,462	)		—
Proceeds from short-term loans		1,889,367			2,955,474
Repayments of short-term loans		(1,425,903	)		(1,773,315	)		)
Proceeds from long-term loans and borrowings from third party investors, net of issuance costs		295,395			—
Repayments of long-term loans and borrowings from third party investors		(19,429	)		(302,060	)		)
Proceeds from issuance of convertible senior notes, net of issuance costs		7,909,506			—
Purchase of capped calls		(567,140	)		—
Proceeds from issuance of subsidiaries’ shares		103,500			114
Acquisition of noncontrolling interests in a subsidiary		(65,000	)		—
Proceeds from exercise of share options		94,601			172,661
Finance lease payments		—			(9,020	)		)
Other financing activities		(4,880	)		(62,425	)		)
Net cash provided by financing activities		8,139,555			981,429
Effect of exchange rate changes on cash, cash equivalents and restricted cash		290,138			(58,523	)		)
Net increase/(decrease) in cash, cash equivalents and restricted cash		332,676			(3,090,893	)		)
Cash, cash equivalents and restricted cash at the beginning of the period		6,760,447			6,909,674
Cash, cash equivalents and restricted cash at the end of the period		7,093,123			3,818,781
Supplemental disclosures of cash flow information:
Acquisition of fixed assets included in accounts payable		289,504			9,943
Acquisition of long-term investments with <br>non-cash<br> consideration		7,500			4,000

All values are in US Dollars.

The accompanying notes are an integral part of the unaudited interim condensed consolidated financial statements.

F-6

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iQIYI, INC.

NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”),

except for number of shares (or ADS) and per share (or ADS) data)

1. ORGANIZATION AND BASIS OF PRESENTATION

iQIYI, Inc. (“iQIYI” or the “Company”) was incorporated under the laws of the Cayman Islands on November 27, 2009. It was formerly known as Ding Xin, Inc. and changed its name to Qiyi.com, Inc. on August 30, 2010 and iQIYI, Inc. on November 30, 2017. The Company completed its initial public offering (“IPO”) on April 3, 2018.

The unaudited interim condensed consolidated financial statements include the accounts of the Company, its wholly-owned subsidiaries, variable interest entities (“VIEs”), and VIEs’ subsidiaries, hereinafter collectively referred to as the “Group”. In the opinion of management, the unaudited interim condensed consolidated financial statements, which comprise the condensed consolidated balance sheet as of September 30, 2020, the condensed consolidated statements of comprehensive loss and the condensed consolidated statements of cash flows for the nine months ended September 30, 2019 and 2020, reflect all adjustments, consisting of normal and recurring adjustments, necessary to present fairly the Company’s consolidated financial position as of September 30, 2020, the Company’s consolidated results of operations and consolidated cash flows for the nine months ended September 30, 2019 and 2020. The consolidated balance sheet data as of December 31, 2019 was derived from the Company’s audited consolidated financial statements, but does not include all disclosures required by U.S. generally accepted accounting principles (“U.S. GAAP”) for annual financial statements. These unaudited interim condensed consolidated financial statements and the notes thereto should be read in conjunction with the Company’s audited consolidated financial statements for the year ended December 31, 2019. Results for the nine months ended September 30, 2020 are not necessarily indicative of the results expected for the full fiscal year or for any future period.

The Group is an innovative platform in China offering a diverse collection of high-quality internet video content, including professionally-produced content licensed from professional content providers and self-produced content, on its platform. The Group provides membership services, online advertising services, content distribution services, live broadcasting services and online gaming services. The Group’s principal geographic market is in the People’s Republic of China (“PRC”) and is penetrating into new geographic regions. The Company does not conduct any substantive operations of its own but conducts its primary business operations through its wholly-owned subsidiaries, VIEs and VIEs’ subsidiaries in the PRC.

As of September 30, 2020, the Company’s major subsidiaries, VIEs and VIEs’ subsidiaries are as follows:

	Place of<br><br> <br>Incorporation		Date of<br><br> <br>Establishment/Acquisition		Effective<br><br> <br>interest held
Subsidiaries:
Beijing QIYI Century Science & Technology Co.,<br> Ltd. (“Beijing QIYI Century”)		PRC		March 8, 2010		100	%
Chongqing QIYI Tianxia Science & Technology Co.,<br> Ltd. (“QIYI Tianxia”)		PRC		November 3, 2010		100	%
iQIYI HK Limited (“QIYI HK”)		Hong Kong		April 14, 2011		100	%
iQIYI Film Group Limited		Cayman		May 26, 2017		100	%
iQIYI Media Limited		Cayman		May 26, 2017		100	%
iQIYI Film Group HK Limited		Hong Kong		June 12, 2017		100	%
Beijing iQIYI New Media Science &Technology Co.,<br> Ltd. (“iQIYI New Media”)		PRC		July 27, 2017		100	%
Skymoons Inc.		Cayman		Acquired on July 17, 2018		100	%
Magic Prime Group Limited		BVI		Acquired on July 17, 2018		80	%
Special (Hong Kong) Co., Ltd		Hong Kong		Acquired on July 17, 2018		80	%
iQIYI International Singapore Pte, Ltd.		Singapore		February 11, 2020		100	%
VIEs and VIEs’ subsidiaries:
Beijing iQIYI Science & Technology Co., Ltd.<br> (“Beijing iQIYI”; formerly known as Beijing<br> Xinlian Xinde Advertisement Media Co., Ltd.)		PRC		Acquired on November 23, 2011		Nil
Shanghai iQIYI Culture Media Co., Ltd. (“Shanghai iQIYI”)		PRC		December 19, 2012		Nil

F-7

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iQIYI, INC.

NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”),

except for number of shares (or ADS) and per share (or ADS) data)

	Place of<br><br> <br>Incorporation	Date of<br><br> <br>Establishment/Acquisition	Effective<br><br> <br>interest held
Shanghai Zhong Yuan Network Co., Ltd.<br> (“Shanghai Zhong Yuan”)	PRC	Acquired on May 11, 2013	Nil
iQIYI Pictures (Beijing) Co., Ltd. (“iQIYI<br> Pictures”)	PRC	December 31, 2014	Nil
Beijing iQIYI Intelligent Entertainment Technology Co., Ltd. (“Intelligent Entertainment”, formerly known as Beijing iQIYI Cinema Management<br> Co., Ltd.)	PRC	June 28, 2017	Nil
Tianjin Skymoons Technology Co., Ltd. (“Tianjin Skymoons”)	PRC	Acquired on July 17, 2018	Nil
Chengdu Skymoons Digital Entertainment Co., Ltd. (“Chengdu Skymoons”)	PRC	Acquired on July 17, 2018	Nil
Chengdu Skymoons Interactive Network Game Co.,Ltd. (“Skymoons Interactive”)	PRC	Acquired on July 17, 2018	Nil

PRC laws and regulations prohibit or restrict foreign ownership of companies that engage in value-added telecommunication services, internet audio-video program services and certain other businesses. To comply with these foreign ownership restrictions, the Group operates its websites and primarily conducts its business in the PRC through the VIEs. The paid-in capital of the VIEs was mainly funded by the Company through loans extended to the authorized individuals who were the shareholders of the VIEs. The Company has entered into certain agreements with the shareholders of the VIEs through the Company or its wholly-owned subsidiaries in the PRC, including loan agreements for the paid-in capital of the VIEs and share pledge agreements for the equity interests in the VIEs held by the shareholders of the VIEs. In addition, the Group has entered into shareholder voting rights trust agreements and exclusive purchase option agreements with the VIEs and nominee shareholders of the VIEs through the Company or its wholly-owned subsidiaries in the PRC, which give the Company or its wholly-owned subsidiaries the power to direct the activities that most significantly affect the economic performance of the VIEs and to acquire the equity interests in the VIEs when permitted by the applicable PRC laws, respectively. Commitment letters have been entered into which obligate the Company to absorb losses of the VIEs that could potentially be significant to the VIEs and certain exclusive agreements have been entered into that entitle the Company or its wholly-owned subsidiaries to receive economic benefits from the VIEs that potentially could be significant to the VIEs.

Despite the lack of legal majority ownership, the Company has effective control of the VIEs through a series of contractual arrangements and a parent-subsidiary relationship exists between the Company and the VIEs. Through the contractual arrangements, the shareholders of the VIEs effectively assigned all of their voting rights underlying their equity interest in the VIEs to the Company. In addition, through the other exclusive agreements, which consist of business operation agreements, business cooperating agreements, exclusive technology consulting and services agreements and trademark and software usage license agreements, the Company, through its wholly-owned subsidiaries in the PRC, have the right to receive economic benefits from the VIEs that potentially could be significant to the VIEs. Lastly, through the commitment letters, the Company has the obligation to absorb losses of the VIEs. Therefore, the Company is considered the primary beneficiary of the VIEs and consolidates the VIEs and their subsidiaries as required by SEC Accounting Standards Codification (“ASC”) topic 810 (“ASC 810”), Consolidation .

In the opinion of the Company’s legal counsel, (i) the ownership structure relating to the VIEs of the Company is in compliance with existing PRC laws and regulations; and (ii) each of the contractual arrangements with the VIEs and their shareholders, and the contractual arrangements taken as a whole, are valid and legally binding upon each party to such agreement under PRC laws; is enforceable against each party thereto in accordance with its terms; and does not contravene any applicable PRC laws or regulations currently in effect.

However, uncertainties in the PRC legal system could cause the Company’s current ownership structure to be found in violation of any existing and/or future PRC laws or regulations and could limit the Company’s ability to enforce its rights under these contractual arrangements. Furthermore, the VIEs’ shareholders may have interests that are different with those of the Company, which could potentially increase the risk that they would seek to act in contrary to the terms of the aforementioned agreements.

F-8

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iQIYI, INC.

NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”),

except for number of shares (or ADS) and per share (or ADS) data)

In addition, if the current structure or any of the contractual arrangements were found to be in violation of any existing or future PRC laws, the Company may be subject to penalties, including but not be limited to: the cancelation or revocation of the Company’s business and operating licenses, being required to restructure the Company’s operations or discontinue the Company’s operating activities. The imposition of any of these or other penalties may result in a material and adverse effect on the Company’s ability to conduct its operations. As a result, the Company may not be able to operate or control the VIEs, which may result in deconsolidation of the VIEs.

The carrying amounts of the assets, liabilities and the results of operations of the VIEs and VIEs’ subsidiaries included in the Company’s consolidated balance sheets and statements of comprehensive loss are as follows:

	As of
	December 31,<br> 2019		September 30,<br> 2020		September 30, 2020
	RMB		RMB		US
ASSETS
Current assets:
Cash and cash equivalents		882,743		909,623
Short-term investments		169,565		228,179
Accounts receivable, net		2,839,945		2,750,509
Licensed copyrights, net		716,008		952,996
Prepayments and other assets		3,202,489		2,958,358
Total current assets		7,810,750		7,799,665
Non-current<br> assets:
Fixed assets, net		856,116		726,666
Long-term investments		2,130,467		2,249,307
Licensed copyrights, net		1,640,582		1,157,843
Produced content, net		4,355,221		5,145,750
Operating lease assets		649,273		736,802
Goodwill		2,412,989		2,412,989
Others		1,552,160		986,015
Total <br>non-current<br> assets		13,596,808		13,415,372
Total assets		21,407,558		21,215,037
LIABILITIES
Current liabilities:
Accounts payable		4,193,022		3,920,413
Customer advances and deferred revenue		2,982,011		2,964,704
Long-term loans, current portion (i)		732,213		712,253
Operating lease liabilities, current portion		95,905		100,201
Accrued expenses and other liabilities		4,090,314		3,949,158
Total current liabilities		12,093,465		11,646,729
Non-current<br> liabilities:
Long-term loans (i)		937,782		664,299
Operating lease liabilities		364,853		620,583
Others		630,195		528,030
Total <br>non-current<br> liabilities		1,932,830		1,812,912
Amounts due to the Company and its subsidiaries		13,583,317		15,618,372
Total liabilities		27,609,612		29,078,013

All values are in US Dollars.

F-9

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iQIYI, INC.

NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”),

except for number of shares (or ADS) and per share (or ADS) data)

	Nine months ended September 30
	2019			2020			2020
	RMB			RMB			US
Total revenues		20,116,714			20,351,564
Net loss		(1,943,153	)		(1,940,779	)		)
Net cash provided by operating activities		1,644,590			259,018
Net cash used for investing activities		(2,173,941	)		(364,693	)		)
Net cash provided by financing activities		586,135			152,753

All values are in US Dollars.

(i)

In accordance with the arrangement as described in Note 7, the Group consolidates the securitization vehicle as it is a VIE for which the Group considers itself the primary beneficiary given the Group has the power to govern the activities that most significantly impact its economic performance and is obligated to absorb losses that could potentially be significant to the VIE. As of December 31, 2019 and September 30, 2020, RMB424,000 (US$62,448) of the loan is repayable within one year and is included in “Long-term loans, current portion” and the remaining balance of RMB527,000 (US$77,619) of the loan is included in “Long-term loans” in the carrying amounts of the liabilities of the VIEs and VIEs’ subsidiaries.

Unrecognized revenue-producing assets held by the VIEs include certain internet content provisions and other licenses, domain names and trademarks. The internet content provisions and other licenses, which are held by the VIEs that provide the relevant services, are required under relevant PRC laws, rules and regulations for the operation of Internet businesses in the PRC, and therefore are integral to the Company’s operations. The VIEs and VIEs’ subsidiaries contributed an aggregate of 94% and 91% of the Group’s consolidated revenues for the nine months ended September 30, 2019 and 2020, respectively, after elimination of inter-company transactions. As of September 30, 2020, there was no pledge or collateralization of the VIEs and VIEs’ subsidiaries’ assets that can only be used to settled obligations of the VIEs and VIEs’ subsidiaries, other than the collateralization of a VIE’s office building as described in Note 7 and the share pledge agreements and business operation agreements with respect to the VIEs contractual arrangements as disclosed in the Company’s audited consolidated financial statements for the year ended December 31, 2019.

The VIEs’ third-party creditors did not have recourse to the general credit of the Company in normal course of business. The Company did not provide or intend to provide financial or other supports not previously contractually required to the VIEs and VIEs’ subsidiaries during the years presented.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Recently adopted accounting pronouncements

Adoption of ASU 2016-13

In June 2016, the Financial Accounting Standards Board (“FASB”) issued ASU 2016-13,

Measurement of Credit Losses on Financial Instruments , which replaces the incurred loss impairment guidance in legacy GAAP and establishes a single allowance framework for financial assets carried at amortized cost with a methodology that requires consideration of a broader range of information to estimate credit losses. The Group adopted ASC 326, Credit Losses (“ASC 326”) on January 1, 2020, using a modified retrospective transition method, which resulted in a cumulative-effect adjustment to increase the opening balance of accumulated deficit on January 1, 2020 by RMB94,048.

The Group maintains an allowance for credit losses for accounts receivable and contract assets, which is recorded as an offset to accounts receivable and contract assets, and the estimated credit losses charged to the allowance is classified as “Selling, general and administrative” in the condensed consolidated statements of comprehensive loss. When similar risk characteristics exist, the Group assesses collectability and measures expected credit losses on a collective basis for a pool of assets, whereas if similar risk characteristics do not exist, the Group assesses collectability and measures expected credit losses on an individual asset basis. In determining the amount of the allowance for credit losses, the Group considers historic collection experience, the age of the accounts receivable and contract assets balances, credit quality of the Group’s customers, current economic conditions, reasonable and supportable forecasts of future economic conditions, and other factors that may affect the customer’s ability to pay.

F-10

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iQIYI, INC.

NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”),

except for number of shares (or ADS) and per share (or ADS) data)

The allowance for credit losses on accounts receivable and contract assets

, including amounts due from related parties,

was RMB151,799 and RMB400,719 (US$59,020) as of December 31, 2019 and September 30, 2020, respectively. The provisions and write-offs charged against the allowance were RMB214,388 (US$31,576) and RMB49,194 (US$7,245), respectively, for the nine months ended September 30, 2020.

For debt securities, the allowance for credit losses reflects the Company’s estimated expected losses over the contractual lives of the debt securities and is recorded as a charge to “Other income, net” in the condensed consolidated statements of comprehensive loss. Estimated allowances of credit losses are determined by considering reasonable and supportable forecasts of future economic conditions in addition to information about past events and current conditions.

Adoption of ASU 2017-04

In January 2017, the FASB issued ASU 2017-04,

Simplifying the Test for Goodwill Impairment , which simplifies the accounting for goodwill impairment by eliminating Step two from the goodwill impairment test. If the carrying amount of a reporting unit exceeds its fair value, an impairment loss shall be recognized in an amount equal to that excess, versus determining an implied fair value in Step two to measure the impairment loss. The Company adopted this guidance on a prospective basis on January 1, 2020 with no material impact on its consolidated financial statements and related disclosures as a result of adopting the new standard.

Adoption of ASU 2019-02

In March 2019, the FASB issued ASU 2019-02,

Improvements to Accounting for Costs of Films and License Agreements for Program Materials (“ASU 2019-02”) which includes the following major changes from previous legacy GAAP that are applicable to the Group:

•	The content distinction for capitalization of production costs of an episodic television series and production costs of films is removed;
•	Entities are required to test films and license agreements for program material for impairment at a film group level when the film or license agreements are predominantly monetized with other films and license agreements;
---	---
•	Entities shall assess estimates of the use of a film in a film group and account for such changes prospectively;
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•	Cash outflows for the costs incurred to obtain rights for both produced and licensed content are required t<br>o<br> be reported as operating cash outflows in the statement of cash flows.
---	---

The Group adopted ASU 2019-02 on January 1, 2020, using a prospective transition method. For the nine months ended September 30, 2020, cash outflows for the costs incurred to acquired licensed copyrights are reported as operating cash outflows in the Group’s condensed consolidated statement of cash flows whereas they were reported as investing cash outflows prior to the adoption of ASU 2019-02. There was no material impact to the condensed consolidated balance sheet or condensed consolidated statement of comprehensive loss. See the Group’s updated accounting policies for Produced Content and Licensed Copyrights below for further details.

To supplement cash flow disclosure of operating activities in 2020, cash paid for content, which includes both licensed copyrights and produced content, is RMB11,941,392 (US$1,758,777) for the nine months ended September 30, 2020.

Produced content, net

The Group produces original content in-house and collaborates with external parties. Produced content primarily consists of films, episodic series, variety shows and animations. The costs incurred in the physical production of original content includes direct production costs, production overhead and acquisition costs. Production costs for original content that are predominantly monetized in a film group are capitalized and reported separately as non-current assets with caption of “Produced content, net” on the condensed consolidated balance sheets. Production costs for original content predominantly monetized on its own are capitalized to the extent that they are recoverable from total revenues expected to be earned (“ultimate revenue”); otherwise, they are expensed as cost of revenues. Ultimate revenue estimates include revenue expected to be earned from all sources, including exhibition, licensing, or exploitation of produced content if the Group has demonstrated a history of earning such revenue. The Group estimates ultimate revenue to be earned during the economic useful lives of produced content based on anticipated release patterns and historical results of similar produced content, which are identified based on various factors, including cast and crew, target audience and popularity. Produced content also includes cash expenditures made to acquire a proportionate share of certain rights to films including profit sharing, distribution and/or other rights. Exploitation costs are expensed as incurred.

F-11

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iQIYI, INC.

NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”),

except for number of shares (or ADS) and per share (or ADS) data)

For produced content that is predominantly monetized in a film group, the Group amortizes film costs using an accelerated method based on historical and estimated future viewership consumption patterns. For produced content that is monetized on its own, the Group amortizes film costs using an accelerated method based on historical and estimated usage patterns of similar produced content, which represents the Group’s best estimate of usage. Based on the estimated patterns, the Group amortizes produced content within ten years, beginning with the month of first availability and such costs are included in “Cost of revenues” in the condensed consolidated statement of comprehensive loss.

Licensed copyrights, net

Licensed copyrights consist of professionally-produced content such as films, television series, variety shows and other video content acquired from external parties. The license fees are capitalized and, unless prepaid, a corresponding liability is recorded when the cost of the content is known, the content is accepted by the Group in accordance with the conditions of the license agreement and the content is available for its first showing on the Group’s websites. Licensed copyrights are presented on the condensed consolidated balance sheet as current and non-current based on estimated time of usage.

The Group’s licensed copyrights include the right to broadcast and, in some instances, the right to sublicense. The broadcasting right, refers to the right to broadcast the content on its own websites and the sublicensing right, refers to the right to sublicense the underlying content to external parties. When licensed copyrights include both broadcasting and sublicensing rights, the content costs are allocated to these two rights upon initial recognition, based on the relative proportion of the estimated total revenues that will be generated by each right over its economic useful lives.

For the right to broadcast the contents on its own websites that generates online advertising and membership services revenues, the content costs are amortized using an accelerated method based on historical and estimated future viewership consumption patterns by categories over the shorter of each content’s contractual period or economic useful lives within ten years, beginning with the month of first availability. Estimates of future viewership consumption patterns and economic useful lives are reviewed periodically, at least on an annual basis and revised, if necessary. Revisions to the amortization patterns are accounted for as a change in accounting estimate prospectively in accordance with ASC topic 250 (“ASC 250”), Accounting Changes and Error Corrections. For the right to sublicense the content to external parties that generates direct content distribution revenues, the content costs are amortized based on its estimated usage pattern and recorded as cost of revenues.

Change in accounting estimates of licensed copyrights and produced content

In

2020, the Group reviewed and revised its estimates of the estimated future viewership consumption patterns and extended the

estimated

useful lives of its licensed copyrights and produced content to better reflect the usage of these content assets. As a result of these revisions, amortization expense decreased by RMB

398,469 (US$58,688)

, net loss decreased by

RMB398,469

(US$58,688), and basic and diluted net loss per Class A and Class B ordinary share decreased by RMB0.08 (US$0.01) for the nine months ended September 30, 2020.

Impairment of licensed copyrights and produced content

Our business model is mainly subscription and advertising based, as such the majority of the Group’s content assets (licensed copyrights and produced content) are predominantly m onetized with other content assets, whereas a smaller portion of the Group’s content assets are predominantly monetized at a specific title level such as variety shows and investments in a proportionate share of certain rights to films including profit sharing, distribution and/or other rights. Because the identifiable cash flows related to content launched on our Mainland China platform are largely independent of the cash flows of other content launched on our overseas platform, the Group has identified two separate film groups. The Group reviews its film groups and individual content for impairment when there are events or changes in circumstances that indicate the fair value of a film group or individual content may be less than its unamortized costs. Examples of such events or changes in circumstances include, a significant adverse change in technological, regulatory, legal, economic, or social factors that could affect the fair value of the film group or the public’s perception of a film or the availability of a film for future showings, a significant decrease in the number of subscribers or forecasted subscribers, or the loss of a major distributor, a change in the predominant monetization strategy of a film that is currently monetized on its own, actual costs substantially in excess of budgeted costs, substantial delays in completion or release schedules, or actual performance subsequent to release failing to meet expectations set before release such as a significant decrease in the amount of ultimate revenue expected to be recognized.

F-12

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iQIYI, INC.

NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”),

except for number of shares (or ADS) and per share (or ADS) data)

When such events or changes in circumstances are identified, the Group assesses whether the fair value of an individual content (or film group) is less than its unamortized film costs, determines the fair value of an individual cont e nt (or film group) and recognizes an impairment charge for the amount by which the unamortized capitalized costs exceed the individual content’s (or film group’s) fair value. The Group mainly uses an income approach to determine the fair value of an individual content or film group, for which the most significant inputs include forecasted future revenues, costs and operating expenses attributable to the film group and the discount rate. An impairment loss attributable to a film group is allocated to individual licensed copyrights and produced content within the film group on a pro rata basis using the relative carrying values of those assets as the Group cannot estimate the fair value of individual contents in the film group without undue cost and effort.

Comparative Information

Certain items in the assets of the VIEs and VIEs’ subsidiaries included in the Company’s condensed consolidated balance sheets have been adjusted to conform with the current year’s presentation to facilitate comparison.

Convenience translation

Translations of amounts from RMB into US$ for the convenience of the reader have been calculated at the exchange rate of RMB6.7896 per US$1.00 on September 30, 2020, as published on the website of the United States Federal Reserve Board. No representation is made that the RMB amounts could have been, or could be, converted into U.S. dollars at such rate.

Use of estimates

The preparation of the condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the period. Management evaluates estimates, including those related to the standalone selling prices of performance obligations of revenue contracts, accrued sales rebates for online advertising revenues, the allowance for credit losses of accounts receivable, contract assets and debt securities, future viewership consumption patterns and useful lives of licensed copyrights and produced content, future revenues generated by the broadcasting and sublicensing rights of content assets (licensed and produced) , useful lives of certain finite-lived intangible assets, fair values of certain debt and equity investments, recoverability and useful lives of long-lived assets, recoverability of indefinite-lived intangible assets and goodwill, ultimate revenue of produced content predominantly monetized on its own, fair values of licensed copyrights and produced content monetized as a film group or individually, the purchase price allocation and fair value of noncontrolling interests with respect to business combinations, fair value of nonmonetary content exchanges, fair value of financial instruments, fair value of share options to purchase the Company’s ordinary shares, forfeiture rates for share options granted, valuation allowances on deferred tax assets and income tax uncertainties, among others. Management bases these estimates on its historical experience and on various other assumptions that are believed to be reasonable, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results could differ from these estimates.

Revenue recognition

The Group’s revenues are derived principally from membership services, online advertising services and content distribution. Revenue is recognized when control of promised goods or services is transferred to the Group’s customers in an amount of consideration to which an entity expects to be entitled to in exchange for those goods or services. Value added taxes (“VAT”) are presented as a reduction of revenues.

The Group’s revenue recognition policies are as follows:

Membership services

The Group offers membership services to subscribing members with various privileges, which primarily including access to exclusive and ad-free streaming of premium content 1080P/4K high-definition video, Dolby Audio, and accelerated downloads and others. When the receipt of membership fees is for services to be delivered over a period of time, the receipt is initially recorded as deferred revenue and revenue is recognized ratably over the membership period as services are rendered. Membership services revenue also includes fees earned from subscribing members for on-demand content purchases and early access to premium content. The Group is the principal in its relationships where partners, including consumer electronics manufacturers (TVs and cell phones), mobile operators and internet service providers, provide access to the membership services as the Group retains control over its service delivery to its subscribing members. Typically, payments made to the partners, such as for payment processing services, are recorded as cost of revenues. For the sale of the right to services, such as cooperation with other parties’ memberships, the Group recognizes revenue on a net basis when the Group does not control the specified services before they are transferred to the customer.

F-13

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iQIYI, INC.

NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”),

except for number of shares (or ADS) and per share (or ADS) data)

Online advertising services

The Group sells advertising services primarily to third-party advertising agencies and a small portion are sold d i rectly to advertisers. Advertising contracts are signed to establish the price and advertising services to be provided. Pursuant to the advertising contracts, the Group provides advertisement placements on its websites in different formats, including but not limited to video, banners, links, logos, brand placement and buttons. The Group performs a credit assessment of the customer to assess the collectability of the contract price prior to entering into contracts. For contracts where the Group provides customers with multiple performance obligations, primarily for advertisements to be displayed in different spots, placed under different forms and occur at different times, the Group would evaluate all the performance obligations in the arrangement to determine whether each performance obligation is distinct. Consideration is allocated to each performance obligation based on its standalone selling price and revenue is recognized as each performance obligation is satisfied through the Group’s display of the advertisements in accordance with the revenue contracts.

The Group provides various sales incentives to its customers for meeting certain cumulative purchase volume requirements, including cash rebates to certain third-party advertising agencies and noncash credits which can be used to acquire future online advertising services in certain bundled arrangements, which are negotiated on a contract by contract basis with customers. The Group accounts for cash rebates granted to customers as variable consideration which is measured based on the most likely amount of incentive to be provided to customers. Noncash credits granted to customers are considered options to acquire additional services that provide customers with a material right. The contract consideration related to these customer options to acquire additional services are deferred and recognized as revenue when future services are transferred or when the options expire.

Content distribution

The Group generates revenues from sub-licensing content licensed from vendors for cash or through nonmonetary exchanges mainly with other online video broadcasting companies. The exclusive licensing agreements the Group enters into with the vendors has a specified license period and provides the Group rights to sub-license these contents to other parties. The Group enters into a non-exclusive

sub-license agreement with a sub-licensee for a period that falls within the original exclusive license period. For cash sub-licensing transactions, the Group is entitled to receive the sub-license fee under the sub-licensing arrangements and does not have any future obligation once it has provided the underlying content to the sub-licensee (which is provided at or before the beginning of the sub-license period). The sub-licensing of content represents a license of functional intellectual property which grants a right to use the Group’s licensed copyrights and is recognized at the point in time when the licensed copyright is made available for the customer’s use and benefit.

The Group also enters into nonmonetary transactions to exchange online broadcasting rights of licensed copyrights with other online video broadcasting companies from time to time. The exchanged licensed copyrights provide rights for each party to broadcast the licensed copyrights received on its own website only. Each transferring party retains the right to continue broadcasting the exclusive content on its own website and/or sublicense the rights to the content it surrendered in the exchange. The Group accounts for these nonmonetary exchanges based on the fair value of the asset received. Barter sublicensing revenues are recognized in accordance with the same revenue recognition criteria above. T h e Group estimates the fair value of the licensed copyrights received using a market approach based on various factors, including the purchase price of similar non-exclusive and/or exclusive contents, broadcasting schedule, cast and crew, theme and box office. The attributable cost of sublicensing transactions, whether for cash or through nonmonetary exchanges, is recognized as cost of revenues through the amortization of the sublicensing right component of the exclusive licensed copyright.

The Group recognized barter sublicensing revenues of RMB493,570 and RMB957,675 (US$141,050) and related costs of RMB411,921 and RMB710,199 (US$104,601) for the nine months ended September 30, 2019 and 2020, respectively.

F-14

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iQIYI, INC.

NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”),

except for number of shares (or ADS) and per share (or ADS) data)

Others

Other revenues mainly include revenues from live broadcasting and online games.

Live broadcasting

The Group operates a live broadcasting platform, iQIYI Show, whereby users can follow their favorite hosts and shows in real time through live broadcasting. Users can purchase virtual currency for usage in iQIYI Show to acquire consumable virtual gifts, which are simultaneously presented to hosts to show their support or time-based virtual items, which enables users to enjoy additional functions and privileges for a specified time period.

The Group operates the live broadcasting platform and determines the price of virtual items sold. Therefore, revenues derived from the sale of virtual items are recorded on a gross basis as the Group acts as the principal in the transaction. Costs incurred from services provided by the hosts are recognized as cost of revenues. To facilitate the sale of virtual items, the Group bundles special privileges and virtual items as a package at a discounted price and the Group allocates the arrangement consideration to each performance obligation based on their relative standalone selling prices. Revenue from the sale of consumable virtual gifts is recognized when consumed by the user, or, in the case of time-based virtual items, recognized ratably over the period each virtual item is made available to the user. Virtual currency sold but not yet consumed by the purchasers is recorded as “Customer advances and deferred revenue” on the condensed consolidated balance sheets.

Online games

The Group operates mobile games including both self-developed and licensed mobile games and generates mobile game revenues from the sale of in-game virtual items, including items, avatars, skills, privileges or other in-game consumables, features or functionality, within the games.

The Group records revenue generated from mobile games on a gross basis if the Group acts as the principal in the mobile game arrangements under which the Group controls the specified services before they are provided to the customer. In addition, the Group is primarily responsible for fulfilling the promise to provide maintenance services and has discretion in setting the price for the services to the customer. Otherwise, the Group records revenue on a net basis based on the ratios pre-determined with the online game developers when all the revenue recognition criteria set forth in ASC 606 are met, which is generally when the user purchases virtual currencies issued by the game developers.

For transactions where the Group is the principal, the Group determines that the in-game virtual items are identified as performance obligations. The Group provides on-going services to the end-users who purchase virtual items to gain an enhanced game-playing experience. Accordingly, the Group recognizes revenues ratably over the estimated average playing period of these paying players, starting from the point in time when virtual items are delivered to the players’ accounts.

Contract balances

When either party to a revenue contract has performed, the Group presents the contract in the condensed consolidated balance sheets as a contract asset or a contract liability, depending on the relationship between the entity’s performance and the customer’s payment.

Contract assets represent unbilled amounts related to the Group’s rights to consideration for advertising services delivered and are included in “Prepayments and other assets” on the condensed consolidated balance sheets. As of December 31, 2019, and September 30, 2020, contract assets were RMB1,875,704 and RMB1,590,327 (US$234,230), respectively, net of an allowance for credit losses of RMB7,225 and RMB11,389 (US$1,677), respectively.

Contract liabilities are the Group’s obligation to transfer goods or services to customers for which the Group has received consideration from customers, which are comprised of: i) payments received for membership fees and other services; ii) virtual currency sold for which the corresponding

services have not yet been provided to

customers ;

and

iii) noncash credits granted to customers. Contract liabilities are primarily presented as “Customer advances and deferred revenue” on the condensed consolidated balance sheets. Balances of contract liabilities were RMB3,954,763 and RMB3,957,230 (US$582,837) as of December 31, 2019 and September 30, 2020, respectively. Revenue recognized for the nine months ended September 30, 2020 that was included in contract liabilities as of January 1, 2020 was RMB2,694,143 (US$396,804).

F-15

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iQIYI, INC.

NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”),

except for number of shares (or ADS) and per share (or ADS) data)

Practical Expedients and Exemptions

The Group does not disclose the value of unsatisfied performance obligations for (i) contracts with an original expected length of one year or less and (ii) contracts for which the Group recognizes revenue at the amount to which it has the right to invoice for services performed.

Concentration of credit risks

Financial instruments that potentially subject the Group to significant concentration of credit risk primarily consist of cash and cash equivalents, restricted cash, short-term investments, accounts receivable and contract assets. The carrying amounts of these assets represent the Group’s maximum exposure to credit risk. As of September 30, 2020, the Group has RMB3,818,781 (US$562,445) in cash, cash equivalents and restricted cash, which is held in cash and demand deposits with several financial institutions primarily in the PRC and Hong Kong. In the event of bankruptcy of one of these financial institutions, the Group may not be able to claim its cash and demand deposits back in full. The Group continues to monitor the financial strength of the financial institutions.

Accounts receivable and contract assets are typically unsecured and denominated in RMB, derived from revenue earned from customers and agencies in the PRC, which are exposed to credit risk. The risk is mitigated by credit evaluations the Group performs on its customers and its ongoing monitoring process of outstanding balances. The Group maintains an allowance for credit losses and actual losses have generally been within management’s expectations. As of December 31, 2019, and September 30, 2020, the Group had no single customer with a balance exceeding 10% of the total accounts receivable and contract assets balance.

Going concern

The accompanying condensed consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities and commitments in the normal course of business. The Company had a working capital deficit of RMB4,940.0 million (US$727.6 million) as of September 30, 2020. In accordance with the terms of the Company’s US$750 million 2023 Convertible Senior Notes , the holders of the notes may request the Company to repurchase a portion or all of the outstanding notes on December 1, 2021.

In order to address its working capital deficit as of September 30, 2020 and to meet its obligations as they become due within one year after the date that the interim condensed consolidated financial statements are issued, the Company may rely on debt financing on fully implemented but unused credit lines from commercial banks

, additional financing generated through the sale of the Company’s debt and/or equity securities and

financial support from shareholder. The Company believes its current cash and cash equivalents, restricted cash, short-term investments, proceeds expected from future financings and

available

financial support from shareholder will provide sufficient funds to meet the Company’s obligations as they become due, and there is no substantial doubt raised about the Company’s ability to continue as a going concern.

Impact of COVID-19

During the nine months ended September 30, 2020, COVID-19 has had limited impact on the Group’s operations, including delays in the production and scheduling of certain new content, lower work efficiency and productivity and service quality. However, COVID-19 has also resulted in a decline in the Group’s online advertising revenues, an increase in expected credit losses and impairment charges to the Group’s content assets. There are still uncertainties of COVID-19’s future impact, and the extent of the impact will depend on a number of factors, including the duration and severity of the pandemic; the uneven impact to certain industries; and the macroeconomic impact of government measures to contain the spread of COVID-19 and related government stimulus measures. As a result, certain of the Group’s estimates and assumptions, including the allowance for credit losses, the valuation of non-marketable equity securities and fair value of financial assets or long-lived assets subject to impairment assessments and fair value of film group, require increased judgment and carry a higher degree of variability and volatility that could result in material changes to the Group’s estimates in future periods.

For further information of other significant accounting policies, see Note 2 to the consolidated financial statements included in the Company’s annual report on Form 20-F for the year ended December 31, 2019, filed with the Commission on March 12, 2020.

F-16

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iQIYI, INC.

NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”),

except for number of shares (or ADS) and per share (or ADS) data)

Recently issued but not yet adopted accounting pronouncements

In August 2020, the FASB issued ASU No. 2020-06,

Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity (“ASU 2020-06”), which focuses on amending the legacy guidance on convertible instruments and the derivatives scope exception for contracts in an entity’s own equity. ASU 2020-06 simplifies an issuer’s accounting for convertible instruments by reducing the number of accounting models that require separate accounting for embedded conversion features. ASU 2020-06 also simplifies the settlement assessment that entities are required to perform to determine whether a contract qualifies for equity classification. Further, ASU 2020-06 enhances information transparency by making targeted improvements to the disclosures for convertible instruments and earnings-per-share (EPS) guidance, i.e., aligning the diluted EPS calculation for convertible instruments by requiring that an entity use the if-converted method and that the effect of potential share settlement be included in the diluted EPS calculation when an instrument may be settled in cash or shares, adding information about events or conditions that occur during the reporting period that cause conversion contingencies to be met or conversion terms to be significantly changed. This update will be effective for the Group’s fiscal years beginning after December 15, 2021, and interim periods within those fiscal years. Early adoption is permitted, but no earlier than fiscal years beginning after December 15, 2020, and interim periods within those fiscal years. Entities can elect to adopt the new guidance through either a modified retrospective method of transition or a fully retrospective method of transition. The Group is currently in the process of evaluating the impact of adopting ASU 2020-06 on its consolidated financial statements and related disclosure.

3. SHAREHOLDERS’ EQUITY

The changes in shareholders’ equity for the nine months ended September 30, 2019 and 2020 are as follows:

	Attributable to iQIYI, INC.
	Ordinary shares				Additional<br> <br>paid-in capital			Accumulated<br> other<br> comprehensive<br> income
	Number of<br> shares		Amount						Accumulated<br> deficit			Noncontrolling<br> interests			Total<br> Shareholders’<br> equity
			RMB		RMB			RMB		RMB			RMB			RMB
Balances as of December 31, 2018		5,075,817,301		321		39,666,150			1,879,946		(23,509,486	)		118,632			18,155,563
Net loss attributable to iQIYI, Inc.		—		—		—			—		(7,829,544	)		28,714			(7,800,830	)
Other comprehensive income		—		—		—			612,035		—			1,107			613,142
Exercise of share-based awards		41,428,030		3		93,057			—		—			—			93,060
Share-based compensation		—		—		769,527			—		—			—			769,527
Equity component of convertible senior notes, net of issuance costs		—		—		987,691			—		—			—			987,691
Purchase of capped call		—		—		(567,140	)		—		—			—			(567,140	)
Issuance of subsidiaries’ shares to noncontrolling interest holders		—		—		—			—		—			3,500			3,500
Acquisition of noncontrolling interests in a subsidiary		—		—		(71,620	)		—		—			6,620			(65,000	)
Balances as of September 30, 2019		5,117,245,331		324		40,877,665			2,491,981		(31,339,030	)		158,573			12,189,513

F-17

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iQIYI, INC.

NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”),

except for number of shares (or ADS) and per share (or ADS) data)

				Additional<br> <br>paid-in capital			Accumulated<br> other<br> comprehensive<br> income
		Amount						Accumulated<br> deficit			Noncontrolling<br> interests			Total<br> Shareholders’<br> equity
		RMB		RMB			RMB		RMB			RMB			RMB
Balances as of December 31, 2019	5,135,516,521		325		41,298,328			2,106,718		(33,834,357	)		42,376			9,613,390
Cumulative effect of adopting ASC 326	—		—		—			—		(94,048	)		—			(94,048	)
Net loss attributable to iQIYI, Inc.	—		—		—			—		(5,490,747	)		15,665			(5,475,082	)
Exercise of share-based awards	59,727,931		4		165,974			—		—			—			165,978
Other comprehensive income	—		—		—			167,558		—			(1,092	)		166,466
Issuance of a subsidiary’s shares to noncontrolling interest holders	—		—		(918	)		—		—			1,032			114
Accretion of a redeemable noncontrolling interest	—		—		—			—		(5,260	)		—			(5,260	)
Dividends paid and payable by a subsidiary	—		—		—			—		—			(22,563	)		(22,563	)
Share-based compensation	—		—		1,021,116			—		—			—			1,021,116
Others	—		—		(20,026	)		—		—			20,026			—
Balances as of September 30, 2020	5,195,244,452		329		42,464,474			2,274,276		(39,424,412	)		55,444			5,370,111
Balances as of September 30, 2020, in US			49		6,254,341			334,965		(5,806,588	)		8,166			790,933

All values are in US Dollars.

F-18

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iQIYI, INC.

NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”),

except for number of shares (or ADS) and per share (or ADS) data)

4. LONG-TERM INVESTMENTS

The Group’s long-term investments primarily consist of equity investments at fair value without readily determinable fair value, equity method investments and held-to-maturity debt securities accounted for at amortized cost.

Equity investments at fair value without readily determinable fair value

As of December 31, 2019, and September 30, 2020, the carrying amount of the Company’s equity investments without readily determinable fair value were as follows:

	As of
	December 31,<br><br> <br>2019			September 30,<br><br> <br>2020			September 30, 2020
	RMB			RMB			US
Initial cost basis		1,797,421			2,677,423
Cumulative unrealized gains		196,663			235,258
Cumulative unrealized losses (including impairment)		(181,274	)		(247,468	)		)
Total carrying amount		1,812,810			2,665,213

All values are in US Dollars.

Impairment charges recognized on equity investments measured at fair value using the measurement alternative were RMB27,100 and RMB73,199 (US$10,781) for the nine months ended September 30, 2019 and 2020, respectively.

Total realized and unrealized gains and losses for equity securities without readily determinable fair values for the nine months ended September 30, 2019 and 2020 were as follows:

	For the nine months ended September 30,
	2019		2020			2020
	RMB		RMB			US
Gross unrealized gains (upward adjustments)		6,076		38,595
Gross unrealized losses (downward adjustments excluding impairment)		—		(495	)		)
Net unrealized gains and losses on equity securities held		6,076		38,100
Net realized gains on equity securities sold		—		—
Total net gains recognized in other income, net		6,076		38,100

All values are in US Dollars.

Equity method investments

In July 2018, the Group acquired a 32% outstanding equity interest amounting to RMB796,000 in Beijing Xin’ai Sports Media Technology co., LTD (or “Xin’ai”) that is engaged in the operation of a sports content platform. The Group has significant influence over the investee and therefore accounts for its equity interest as an equity method investment. The excess of the carrying value of the investment over the proportionate share of Xin’ai’s net assets of RMB609,502 was recognized as basis differences and investment goodwill. As of September 30, 2020, the Group’s equity interest in

Xin’ai

was diluted to 24% due to subsequent rounds of equity financing.

As of December 31, 2019 and September 30, 2020,

the Group also held several other equity method investments through its subsidiaries or VIEs, all of which the Group can exercise significant influence but does not own a majority equity interest in or has control over. The other equity method investments were not significant. The carrying amount of the Group’s equity method investments including Xin’ai was RMB663,376 and RMB552,437 (US$81,365) as of December 31, 2019 and September 30, 2020, respectively.

F-19

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iQIYI, INC.

NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”),

except for number of shares (or ADS) and per share (or ADS) data)

Held-to-maturity debt securities

In 2019, the Group purchased US$71,000 of held-to-maturity debt securities with maturities of two years from a financial institution and pledged them as collaterals against certain long-term loans (Note 7). As of September 30, 2020, the carrying value of long-term held-to-maturity debt securities was RMB482,462 (US$71,059). As of December 31, 2019 and September 30, 2020, the gross unrecognized holding losses were RMB4,911 and nil, respectively, and the gross unrecognized holding gains were nil and RMB13,071 (US$1,925), respectively.

5. LICENSED COPYRIGHTS, NET

	As of December 31, 2019
	Gross carrying<br><br> <br>value		Accumulated<br><br> <br>amortization			Impairment<br><br> <br>amount			Net carrying<br> value
	RMB		RMB			RMB			RMB
Licensed copyrights
—Broadcasting rights		32,038,423		(24,500,895	)		(25,317	)		7,512,211
—Sublicensing rights		4,632,586		(4,632,586	)		—			—
		36,671,009		(29,133,481	)		(25,317	)		7,512,211
Less: current portion:
—Broadcasting rights		11,752,412		(10,502,214	)		(25,317	)		1,224,881
—Sublicensing rights		4,632,586		(4,632,586	)		—			—
		16,384,998		(15,134,800	)		(25,317	)		1,224,881
Licensed <br>copyrights—non-current
—Broadcasting rights		20,286,011		(13,998,681	)		—			6,287,330
—Sublicensing rights		—		—			—			—
		20,286,011		(13,998,681	)		—			6,287,330
	As of September 30, 2020
---	---	---	---	---	---	---	---	---	---	---	---
	Gross carrying<br><br> <br>value		Accumulated<br><br> <br>amortization			Impairment<br><br> <br>amount			Net carrying value
	RMB		RMB			RMB			RMB		US
Licensed copyrights
—Broadcasting rights		36,240,889		(28,588,974	)		(365,799	)		7,286,116
—Sublicensing rights		5,613,400		(5,590,590	)		—			22,810
		41,854,289		(34,179,564	)		(365,799	)		7,308,926
Less: current portion:
—Broadcasting rights		8,889,238		(7,618,439	)		(46,194	)		1,224,605
—Sublicensing rights		5,613,400		(5,590,590	)		—			22,810
		14,502,638		(13,209,029	)		(46,194	)		1,247,415
Licensed <br>copyrights—non-current
—Broadcasting rights		27,351,651		(20,970,535	)		(319,605	)		6,061,511
—Sublicensing rights		—		—			—			—
		27,351,651		(20,970,535	)		(319,605	)		6,061,511

All values are in US Dollars.

F-20

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iQIYI, INC.

NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”),

except for number of shares (or ADS) and per share (or ADS) data)

Amortization expense of RMB9,531,104 and RMB8,599,610 (US$1,266,586) for the nine months ended September 30, 2019 and 2020, respectively, was recognized as cost of revenues. Estimated amortization expense relating to the existing licensed copyrights for each of the next three years is as follows:

	RMB		US
Three months ending December 31, 2020		1,510,992
Year ending December 31, 2021		2,660,860
Year ending December 31, 2022		1,112,819
Year ending December 31, 2023		668,234

All values are in US Dollars.

To supplement cash flow disclosure of investing activities in 2019, acquisition of licensed copyrights included in current liabilities and from nonmonetary content exchanges for the nine months ended September 30, 2019 are RMB6,540,834 and RMB746,255, respectively.

6. PRODUCED CONTENT, NET

	As of December 31,
	2019
	RMB
Released, less amortization		891,574
In production		3,074,946
In development		388,701
		4,355,221
	As of September 30,
---	---	---	---
	2020		2020
	RMB		US
Released, less amortization and impairment
— Predominantly monetized with other content assets		1,516,977
— Predominantly monetized on its own		54,122
		1,571,099
In production, less impairment
— Predominantly monetized with other content assets		2,897,231
— Predominantly monetized on its own		182,873
		3,080,104
In development, less impairment
— Predominantly monetized with other content assets		774,712
— Predominantly monetized on its own		91,180
		865,892
Total		5,517,095

All values are in US Dollars.

Amortization expense of

RMB2,228,522 (US$328,225)

and

R MB 837,583 (US$123,363)

was recognized as cost of revenues in the condensed consolidated statement of comprehensive loss for the nine months ended September 30, 2020, for produced content predominantly monetized with other content assets and for produced content predominantly monetized on its own, respectively. Amortization expense for produced content was RMB2,324,085 for the nine months ended September 30, 2019. Estimated amortization expense relating to produced content that has been released for each of the next three years is as follows:

	RMB		US
Three months ending December 31, 2020		326,064
Year ending December 31, 2021		421,467
Year ending December 31, 2022		214,681
Year ending December 31, 2023		147,147

All values are in US Dollars.

7. LOANS PAYABLE

Short-term Loans

Short-term loans as of December 31, 2019 and September 30, 2020 amounted to RMB2,618,170 and RMB3,804,396 (US$560,327), respectively, which consisted of secured RMB denominated borrowings from financial institutions in the PRC that are repayable within one year. As of December 31, 2019, and September 30, 2020, the repayments of primarily all of the short-term loans are guaranteed by subsidiaries within the Group and either collateralized by an office building of one of the Group’s VIEs with a carrying amount of RMB561,515 and RMB551,734 (US$81,262), respectively, or collateralized by restricted cash balances totaling US$138,572 and US$93,572 (equivalent to RMB635,316), respectively. The weighted average interest rate for the outstanding borrowings as of December 31, 2019 and September 30, 2020 was 4.05% and 4.21%, respectively. As of December 31, 2019, and September 30, 2020, the aggregate amounts of unused lines of credit for short-term loans were RMB1,620,520 and RMB1,682,054 (US$247,740), respectively.

F-21

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iQIYI, INC.

NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”),

except for number of shares (or ADS) and per share (or ADS) data)

Structured payable arrangements

In 2020, the Group entered into structured payable arrangements with banks or other financial institutions (“factoring arrangements”), which extended the original payment terms. Under the factoring arrangements, the suppliers’ receivables collection process was accelerated through selling its receivables from the Group to the banks or other financial institutions at a discount. The Group was legally obligated to pay the banks or other financial institutions in the amount totaling

RMB395,943 (US$58,316

), maturing within one year.

As a result of the factoring arrangements, the payment terms of the Group’s original accounts payables were substantially modified and considered extinguished as the nature of the original liability has changed from accounts payables to loan borrowings from banks or other financial institutions. The proceeds from borrowings from banks or other financial institutions is a financing activity and is reported as “Proceeds from short-term loans” on the condensed consolidated statements of cash flows. As of September 30, 2020, the outstanding borrowings from the factoring arrangements wer e

RMB384,428 (US$56,620), which is repayable within one year and are included in “Short-term loans” on the condensed consolidated balance sheets.

Long-term Loans

In 2017, the Group borrowed a secured RMB denominated loan of RMB299,000 with an interest rate of 4.47% for a three-year term from the Bank of China for its general working capital purposes. Pursuant to the agreement, the principal shall be repaid by installments from 2017 to 2020. T he repayment of the loan is guaranteed by a subsidiary of the Group and collateralized by an office building of one of the Group’s VIEs with a carrying amount of RMB561,515. Principal repayments were made on the loan when they became due and amounted to RMB5,000 and RMB274,000 (US$40,356) for the nine months ended September 30, 2019 and 2020, respectively. The loan was fully repaid as of September 30, 2020.

In 2019, the Group entered into a two-year loan agreement with JPMorgan Chase Bank, N.A., pursuant to which the Group is entitled to borrow a secured RMB denominated loan of RMB800,000 for its general working capital purposes. In 2019, the Group drew down RMB447,949 with an interest rate of 3.55%. Pursuant to the agreement, the principal shall be repaid in installments from 2019 to 2021. As of December 31, 2019 and September 30, 2020, the repayment of the loan is collateralized by long-term held-to-maturity debt securities with a stated cost of US$71,000 and US$71,000 (equivalent to RMB482,062), respectively (Note 4). Principal repayments were made on the loan when they became due and amounted to RMB nil and RMB19,444 (US$2,864) for the nine months ended September 30, 2019 and 2020, respectively. The amount repayable within the next twelve months are classified as “Long-term loans, current portion”.

Borrowings from third-party investors

Asset-backed debt securities

In December 2018, certain supplier invoices selected by the Group totaling RMB525,279 were factored to a financial institution (the “2018 factored receivables”) at a discount. These supplier invoices were recorded as accounts payables in the Group’s condensed consolidated balance sheets. The 2018 factored receivables were further transferred to a securitization vehicle, whereby debt securities securitized by the 2018 factored receivables, maturing in December 2019 and December 2020, were issued to third party investors with a stated interest of 5.0%-5.5% and raised total gross proceeds of RMB446,000.

In November 2019, certain supplier invoices selected by the Group totaling RMB587,000 were factored to a financial institution (the “2019 factored receivables”) at a discount. These supplier invoices were recorded as accounts payables in the Group’s condensed consolidated balance sheets. The 2019 factored receivables were further transferred to a securitization vehicle, whereby debt securities securitized by the 2019 factored receivables, maturing in November 2021, were issued to third party investors with a stated interest of 5.1% and raised total gross proceeds of RMB500,000.

F-22

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iQIYI, INC.

NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”),

except for number of shares (or ADS) and per share (or ADS) data)

The proceeds raised from issuance of the asset-backed debt securities were used by the financial institutions to factor the supplier invoices. At the same time, the credit terms of the Group’s corresponding trade payables were extended to mirror the maturity of the asset-backed debt securities.

Accounting for asset-backed debt securities

The Group consolidates the securitization vehicles as VIEs for which the Group considers itself the primary beneficiary given the Group has the power to govern the activities that most significantly impact its economic performance and is obligated to absorb losses that could potentially be significant to the VIEs.

As a result of the series of transactions described above, the payment terms of the Group’s original trade payables were substantially modified and considered extinguished as the nature of the original liability has changed from that of a trade payable to loan borrowings from third-party investors. The proceeds from borrowings from third-party investors is a financing activity and reported as “Proceeds from long-term loans and borrowings from third party investors, net of issuance costs” on the condensed consolidated statements of cash flows.

As of December 31, 2019 and September 30, 2020, the outstanding borrowings from asset-backed debt securities were RMB898,097 and RMB936,100 (US$137,873). RMB74,992 of 2018 asset-backed debt securities was repaid when it became due in December 2019. RMB445,113 (US$65,558) of asset-backed debt securities is repayable within one year and are included in “Long-term loans, current portion” and the remaining balance of RMB490,987 (US$72,315) of 2019 asset-backed debt securities is included in non-current “Long-term loans” on the condensed consolidated balance sheets. The effective interest rate of 2018 asset-backed debt securities and 2019 asset-backed debt securities was 7.00% and 5.97%, respectively.

8. CONVERTIBLE SENIOR NOTES

2023 Convertible Senior Notes

On December 4, 2018, the Company issued US$750 million convertible senior notes (the “2023 Notes”). The 2023 Notes are senior, unsecured obligations of the Company, and interest is payable semi-annually in cash at a rate of 3.75% per annum on June 1 and December 1 of each year, beginning on June 1, 2019. The 2023 Notes will mature on December 1, 2023 unless redeemed, repurchased or converted prior to such date.

The initial conversion rate of the 2023 Notes is 37.1830 of the Company’s ADS per US$1,000 principal amount of the 2023 Notes (which is equivalent to an initial conversion price of approximately US$26.89 per ADS). Prior to June 1, 2023, the 2023 Notes will be convertible at the option of the holders only upon the following circumstances: (1) during any calendar quarter commencing after the calendar quarter ending on March 31, 2019, if the last reported sale price of ADSs for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding calendar quarter is greater than or equal to 130% of the conversion price; (2) during the five business day period after any ten consecutive trading day period in which the trading price per US$1,000 principal amount of notes was less than 98% of the product of the last reported sale price of the ADSs and the conversion rate on each such trading day; (3) if the Company calls the notes for a tax redemption; or (4) upon the occurrence of specified corporate events. Thereafter, the 2023 Notes will be convertible at the option of the holders at any time until the close of business on the second scheduled trading day immediately preceding the maturity date. The conversion rate is subject to adjustment in some events but is not adjusted for any accrued and unpaid interest. In addition, following a make-whole fundamental change that occurs prior to the maturity date or following the Company’s delivery of a notice of a tax redemption, the Company will increase the conversion rate for a holder who elects to convert its notes in connection with such a corporate event or such tax redemption. Upon conversion, the Company will pay or deliver to such converting holders, as the case may be, cash, ADSs, or a combination of cash and ADSs, at its election.

The holders may require the Company to repurchase all or portion of the 2023 Notes for cash on December 1, 2021, or upon a fundamental change, at a repurchase price equal to 100% of the principal amount, plus accrued and unpaid interest.

F-23

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iQIYI, INC.

NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”),

except for number of shares (or ADS) and per share (or ADS) data)

In connection with the issuance of the 2023 Notes, the Company purchased capped call options (the “2023 Capped Call”) on the Company’s ADS with certain counterparties at a price of US$67.5 million. The 2023 Capped Call exercise price is equal to the 2023 Notes’ initial conversion price and the cap price is US$38.42 per ADS, subject to certain adjustments under the terms of the capped call transactions. The capped call transactions are expected to reduce potential dilution to existing holders of the ordinary shares and ADSs of the Company upon conversion of the 2023 Notes and/or offset any potential cash payments that the Company is required to make in excess of the principal amount of any converted notes, as the case may be, with such reduction and/or offset subject to a cap.

2025 Convertible Senior Notes

On March 29, 2019, the Company issued US$1,200 million convertible senior notes (the “2025 Notes”). The 2025 Notes are senior, unsecured obligations of the Company, and interest is payable semi-annually in cash at a rate of 2.00% per annum on October 1 and April 1 of each year, beginning on October 1, 2019. The 2025 Notes will mature on April 1, 2025 unless redeemed, repurchased or converted prior to such date.

The initial conversion rate of the 2025 Notes is 33.0003 of the Company’s ADS per US$1,000 principal amount of the 2025 Notes (which is equivalent to an initial conversion price of approximately US$30.30 per ADS). Prior to October 1, 2024, the 2025 Notes will be convertible at the option of the holders only upon the following circumstances: (1) during any calendar quarter commencing after the calendar quarter ending on June 30, 2019, if the last reported sale price of ADSs for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding calendar quarter is greater than or equal to 130% of the conversion price; (2) during the five business day period after any ten consecutive trading day period in which the trading price per US$1,000 principal amount of notes was less than 98% of the product of the last reported sale price of the ADSs and the conversion rate on each such trading day; (3) if the Company calls the notes for a tax redemption; or (4) upon the occurrence of specified corporate events. Thereafter, the 2025 Notes will be convertible at the option of the holders at any time until the close of business on the second scheduled trading day immediately preceding the maturity date. The conversion rate is subject to adjustment in some events but is not adjusted for any accrued and unpaid interest. In addition, following a make-whole fundamental change that occurs prior to the maturity date or following the Company’s delivery of a notice of a tax redemption, the Company will increase the conversion rate for a holder who elects to convert its notes in connection with such a corporate event or such tax redemption. Upon conversion, the Company will pay or deliver to such converting holders, as the case may be, cash, ADSs, or a combination of cash and ADSs, at its election.

The holders may require the Company to repurchase all or portion of the 2025 Notes for cash on April 1, 2023, or upon a fundamental change, at a repurchase price equal to 100% of the principal amount, plus accrued and unpaid interest.

In connection with the issuance of the 2025 Notes, the Company purchased capped call options (the “2025 Capped Call”) on the Company’s ADS with certain counterparties at a price of US$84.5 million. The 2025 Capped Call exercise price is equal to the 2025 Notes’ initial conversion price and the cap price is US$40.02 per ADS, subject to certain adjustments under the terms of the capped call transactions. The capped call transactions are expected to reduce potential dilution to existing holders of the ordinary shares and ADSs of the Company upon conversion of the 2025 Notes and/or offset any potential cash payments that the Company is required to make in excess of the principal amount of any converted notes, as the case may be, with such reduction and/or offset subject to a cap.

Accounting for Convertible Senior Notes

As the conversion option may be settled in cash at the Company’s option, the Company separated the 2023 Notes and the 2025 Notes (collectively as the “Notes”) into liability and equity components in accordance with ASC 470-20,

Debt with Conversion and Other Options . The carrying amount of the liability component was calculated by measuring the fair value of a similar liability that does not have an associated conversion feature. The carrying amount of the equity component representing the conversion option was determined by deducting the fair value of the liability component from the initial proceeds and recorded as additional paid-in capital. The difference between the principal amount of the 2023 Notes and the liability component is considered debt discount and is amortized at an effective interest rate of 7.04% to accrete the discounted carrying value of the 2023 Notes to its face value on December 1, 2021, the put date of the 2023 Notes. The difference between the principal amount of the 2025 Notes and the liability component is considered debt discount and is amortized at an effective interest rate of 6.01% to accrete the discounted carrying value of the 2025 Notes to its face value on April 1, 2023, the put date of the 2025 Notes.

F-24

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iQIYI, INC.

NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”),

except for number of shares (or ADS) and per share (or ADS) data)

The cost of the 2023 Capped Call and 2025 Capped Call of US$67.5 million and US$84.5 million were recorded as a reduction of the Company’s additional paid-in capital on the condensed consolidated balance sheets with no subsequent changes in fair value be recorded.

The net proceeds from the issuance of the 2023 Notes and the 2025 Notes were US$736.7 million and US$1,179.0 million, after deducting underwriting discounts and offering expenses of US$13.3 million and US$21.0 million from the initial proceeds of US$750 million and US$1,200 million, respectively. Debt issuance costs were allocated to the liability and equity components based on the same proportion as the recognized amounts of liability and equity components determined above.

As of December 31, 2019 and September 30, 2020, the principal amount of the liability component of the Notes were RMB13,577.9 million and RMB13,241.5 million (US$1,950.3 million), unamortized debt discount were RMB1,281.0 million and RMB934.2 million (US$137.6 million), and the net carrying amount of the liability component were RMB12,296.9 million and RMB12,307.3 million (US$1,812.7 million), respectively. The carrying amount of the equity component of the Notes were RMB1,349.3 million and RMB1,349.3 million (US$198.7 million), respectively. For the nine months ended September 30, 2019 and 2020, the amount of interest cost recognized relating to both the contractual interest coupon and amortization of the discount on the liability component were RMB471.2 million and RMB595.6 million (US$87.7 million), respectively. As of September 30, 2020, the liability component of the 2023 Notes and the 2025 Notes will be accreted up to the principal amount of US$750 million and US$1,200 million over a remaining period of 1.17 years and 2.50 years, respectively.

9. INCOME TAXES

The Company is incorporated in the Cayman Islands and conducts its primary business operations through the subsidiaries and VIEs in the PRC. It also has intermediate holding companies in Hong Kong and Singapore. Under the current laws of the Cayman Islands, the Company is not subject to tax on income or capital gains. Additionally, upon payment of dividends by the Company to its shareholders, no Cayman Islands withholding tax will be imposed. Under the Hong Kong tax laws, subsidiaries in Hong Kong are subject to the Hong Kong profits tax rate at 16.5% and they may be exempted from income tax on their foreign-derived income and there are no withholding taxes in Hong Kong on remittance of dividends. Under the Singapore tax laws, subsidiaries in Singapore are subject to a unified 17% tax rate, except for certain entities that are entitled to preferential tax treatments, and there are no withholding taxes in Singapore on remittance of dividends.

Under the PRC Enterprise Income Tax (“EIT”) Law, which has been effective since January 1, 2008, domestic enterprises and Foreign Investment Enterprises (the “FIEs”) are subject to a unified 25% enterprise income tax rate, except for certain entities that are entitled to preferential tax treatments.

The effective tax rates were negative 0.38% and 0.73% for the nine months ended September 30, 2019 and 2020, respectively. The effective tax rates were lower than the PRC statutory EIT rate of 25% mainly because PRC entities file separate tax returns and most subsidiaries were in an accumulated loss position.

The effective tax rates are subject to change in subsequent period as the estimates of pretax income or loss for the year increase or decrease and certain subsidiaries of the Company may or may not continue to qualify for certain preferential tax rates.

Valuation allowances have been provided on the net deferred tax assets where, based on all available evidence, it was considered more likely than not that some portion or all of the recorded deferred tax assets will not be realized in future periods. Realization of the net deferred tax assets is dependent on factors including future reversals of existing taxable temporary differences and adequate future taxable income, exclusive of reversing deductible temporary differences and tax loss or credit carry forwards. The Group evaluates the potential realization of deferred tax assets on an entity-by-entity basis. As of December 31, 2019 and September 30, 2020, valuation allowances were provided against deferred tax assets in entities where it was determined it was more likely than not that the benefits of the deferred tax assets will not be realized.

The Group evaluated its income tax uncertainty under ASC 740. ASC 740 clarifies the accounting for uncertainty in income taxes by prescribing the recognition threshold a tax position is required to meet before being recognized in the financial statements. The Group elects to classify interest and penalties related to an uncertain tax position, if and when required, as part of income tax expense in the con densed consolidated statements of comprehensive loss. As of December 31, 2019, and September 30, 2020, there was no significant impact from tax uncertainty on the Group’s financial position and result of operations. The Group does not expect the amount of unrecognized tax benefits would increase significantly in the next 12 months. In general, the PRC tax authorities have up to five years to conduct examinations of the tax filings of the Group’s PRC subsidiaries. Accordingly, the PRC subsidiaries’ tax filings from 2015 through 2019 remain open to examination by the respective tax authorities. The Group may also be subject to the examinations of the tax filings in other jurisdictions, which are not material to the consolidated financial statements.

F-25

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iQIYI, INC.

NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”),

except for number of shares (or ADS) and per share (or ADS) data)

10. COMMITMENTS AND CONTINGENCIES

Commitments for property management fees

Future minimum payments under non-cancelable agreements for property management fees consist of the following as of September 30, 2020:

	RMB		US
2020		2,378
2021		23,138
2022		23,667
2023		17,479
2024 and thereafter		41,225
		107,887

All values are in US Dollars.

Commitments for Licensed Copyrights and Produced Content

Future minimum payments under non-cancelable agreements for licensed copyrights and produced content consist of the following as of September 30, 2020:

	RMB		US
2020		6,107,029
2021		7,743,333
2022		3,755,818
2023		1,734,388
2024 and thereafter		1,267,381
		20,607,949

All values are in US Dollars.

Capital commitment

As of September 30, 2020, commitments for the purchase of fixed assets are immaterial.

Litigation

The Group is involved in a number of claims pending in various courts, in arbitration, or otherwise unresolved as of September 30, 2020. These claims are substantially related to alleged copyright infringement as well as routine and incidental matters to its business, among others. Adverse results in these claims may include awards of damages and may also result in, or even compel, a change in the Group’s business practices, which could impact the Group’s future financial results. The Group has accrued RMB34,494

(US$5,080) in “Accrued expenses and other liabilities” in the

condensed

consolidated balance sheet as of September 30, 2020 and recognized losses of RMB2,216 (US$326) for the nine months ended September 30, 2020.

Starting in April 2020, the Group and certain of its current and former officers and directors were named as defendants in putative securities class actions filed in federal court. All of these cases were purportedly brought on behalf of a class of persons who allegedly suffered damages as a result of alleged misstatements and omissions in the Group’s public disclosure documents. As the cases remain in their preliminary stages, the likelihood of any unfavorable outcome or the amount or range of any potential loss cannot be reasonably estimated at the issuance date of the unaudited interim condensed consolidated financial statements. As a result, as of September 30, 2020, the Group did not record any liabilities for the loss contingencies pertaining to the cases described above.

F-26

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iQIYI, INC.

NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”),

except for number of shares (or ADS) and per share (or ADS) data)

The Group is unable to estimate the reasonably possible loss or a range of reasonably possible losses for proceedings in the early stages or where there is a lack of clear or consistent interpretation of laws specific to the industry-specific complaints among different jurisdictions. Although the results of unsettled litigations and claims cannot be predicted with certainty, the Group does not believe that, as of September 30, 2020, there was at least a reasonable possibility that the Group may have incurred a material loss, or a material loss in excess of the accrued expenses, with respect to such loss contingencies. The losses accrued include judgments made by the court and out-of-court settlements after September 30, 2020, but related to cases arising on or before September 30, 2020. The Group is in the process of appealing certain judgments for which losses have been accrued.

11. REDEEMABLE NONCONTROLLING INTERESTS

In October 2019, one of the Group’s VIE’s subsidiary completed a round of preferred shares financing with RMB100,000 from third-party preferred shareholders. As the preferred shares can be redeemed by such shareholders upon the occurrence of certain events that are not solely within the control of the Group, these preferred shares are accounted for as redeemable noncontrolling interests.

The Group accounts for the changes in accretion to the redemption value in accordance with ASC Topic 480, Distinguishing Liabilities from Equity . The Group elects to use the effective interest method to account for the changes of redemption value over the period from the date of issuance to the earliest redemption date of the noncontrolling interest.

The movement in the carrying value of the redeemable noncontrolling interests is as follows:

	2020		2020
	RMB		US
Balance as of January 1		101,542
Issuance of subsidiary shares		—
Accretion of redeemable noncontrolling interests		5,260
Balance as of September 30		106,802

All values are in US Dollars.

12. RESTRICTED NET ASSETS

As of December 31, 2019, and September 30, 2020, the Company’s PRC subsidiaries, VIEs and VIEs’ subsidiaries had appropriated RMB23,073 and RMB20,071

(US$2,956), respectively, in its statutory reserves.

Under the PRC laws and regulations, the subsidiaries, VIEs and the VIEs’ subsidiaries incorporated in the PRC are restricted in their ability to transfer a portion of their net assets to the Group either in the form of dividends, loans or advances of the combined and consolidated net assets as of September 30, 2020. Even though the Group currently does not require any such dividends, loans or advances from the PRC subsidiaries, VIEs and VIEs’ subsidiaries for working capital and other funding purposes, the Company may in the future require additional cash resources from its PRC subsidiaries, VIEs and VIEs’ subsidiaries due to changes in business conditions, to fund future acquisitions and development, or merely declare and pay dividends to or distribution to its shareholders. Amounts of net assets restricted include paid-in capital of the Company’s PRC subsidiaries and the net assets of the VIEs and VIEs’ subsidiaries in which the Company has no legal ownership, totaling RMB18,644,489 (US$2,746,036) as of September 30, 2020.

F-27

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iQIYI, INC.

NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”),

except for number of shares (or ADS) and per share (or ADS) data)

13. LOSS PER SHARE

Basic and diluted net loss per Class A and Class B ordinary share for the nine months ended September 30, 2019 and 2020 are as follows:

	For the nine months ended September 30,
	2019						2020					2020
	Class A			Class B			Class A					Class B
	RMB			RMB			RMB			US		RMB			US
Numerator:
Net loss attributable to iQIYI, Inc.		(3,412,357	)		(4,417,187	)		(2,428,380	)		)		(3,062,367	)		)
Accretion of redeemable noncontrolling interests		—			—			(2,326	)		)		(2,934	)		)
Net loss attributable to iQIYI, Inc.’s ordinary shareholders		(3,412,357	)		(4,417,187	)		(2,430,706	)		)		(3,065,301	)		)
Denominator:
Weighted average number of ordinary shares outstanding, basic		2,222,064,998			2,876,391,396			2,280,906,536					2,876,391,396
Weighted average number of ordinary shares outstanding, diluted		2,222,064,998			2,876,391,396			2,280,906,536					2,876,391,396
Net loss per share, basic		(1.54	)		(1.54	)		(1.07	)		)		(1.07	)		)
Net loss per share, diluted		(1.54	)		(1.54	)		(1.07	)		)		(1.07	)		)

All values are in US Dollars.

The effects of the convertible senior notes, share options and restricted share units were excluded from the computation of diluted net loss per share for the nine months ended September 30, 2019 and 2020, as their effects would be anti-dilutive.

14. RELATED PARTY TRANSACTIONS

a) The table below sets forth the major related parties and their relationships with the Group:

Name of related parties	Relationship with the Group
Baidu and its subsidiaries (“Baidu Group”)<br><br>Others	Controlling shareholder of the Company<br><br>Equity investees

F-28

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iQIYI, INC.

NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”),

except for number of shares (or ADS) and per share (or ADS) data)

b) The Group had the following related party transactions with the major related parties:

	Nine months ended September 30,
	2019		2020		2020
	RMB		RMB		US
Membership services
Membership services revenue earned from memberships sold to Baidu Group		14,051		11,900
Membership services revenue earned from memberships sold by Others		8,047		740
Online advertising revenues
Advertising services provided to Baidu Group		37,484		94,651
Advertising services provided to Others		14,151		59,074
Content distribution revenues
Content licensed to Others		389,990		137,597
Other revenues
Other services provided to Baidu Group		7,946		11,976
Other services provided to Others		31,022		30,019
Interest income
Loans due from Others		3,596		1,247
		506,287		347,204
Cost of revenues
License fees to Baidu Group		18,902		11,839
Bandwidth fee to Baidu Group		747,194		763,801
Traffic acquisition and other services provided by Baidu Group (i)		119,652		—
Others (ii)		80,196		52,244
Selling, general and administrative
Advertising services provided by Baidu Group		1,440		771
Others		1,042		16,362
Research and development
Cloud services provided by Baidu Group		12,085		7,381
		980,511		852,398

All values are in US Dollars.

(i)	On April 12, 2018, the Company issued to Baidu an aggregate of 36,860,691 Class B ordinary shares pursuant to a share purchase agreement with Baidu entered into in February 2018, in exchange for Baidu providing traffic acquisition and other services in relation with ticket booking service, which was recorded as intangible assets.
(ii)	The transactions mainly represent revenue sharing arrangements with various equity investees. The Group entered into a revenue sharing arrangement in 2018 to become the exclusive sales agent for an equity investee and provided a minimum guarantee of a RMB100,000 of annual sales for a one year period. RMB61,698 and RMB nil (US$ nil) was recognized as cost of revenues for the nine months ended September 30, 2019 and 2020, respectively.
---	---

For the nine months ended September 30, 2019 and 2020, the Group purchased contents from various equity investees for total amounts of RMB510,889 and RMB993,652 (US$ 146,349), respectively.

F-29

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iQIYI, INC.

NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”),

except for number of shares (or ADS) and per share (or ADS) data)

c) The Group had the following related party balances with the major related parties:

	As of
	December 31,<br> 2019		September 30,<br><br> <br>2020		September 30, 2020
	RMB		RMB		US
Amounts due from related parties, current:
Due from Baidu Group (i)		35,560		48,868
Loans receivable from Others (ii)		105,934		—
Due from Others (iii)		70,499		120,931
		211,993		169,799
Amounts due from related parties, <br>non-current:
Due from Others (iv)		172,200		242,000
		172,200		242,000
	As of
	December 31,<br><br> <br>2019		September 30,<br><br> <br>2020		September 30, 2020
	RMB		RMB		US
Amounts due to related parties, current:
Loans due to Baidu Group (v)		50,000		50,000
Due to Baidu Group (vi)		1,014,283		800,815
Deferred revenue in relation to services to be provided<br><br>to an equity investee (vii)		169,677		166,144
Due to Others (viii)		370,298		811,126
		1,604,258		1,828,085
Amounts due to related <br>parties, non-current:
Loans due to Baidu Group (v)		650,000		650,000
Due to Baidu Group (vi)		1,570		2,050
Deferred revenue in relation to services to be provided<br><br>to an equity investee (vii)		410,187		341,512
Due to Others		126		46
		1,061,883		993,608

All values are in US Dollars.

(i)	The balance mainly represents amounts due from Baidu Group for advertising services.
(ii)	The balance as of December 31, 2019 represents loans provided to a Group’s equity investee with an interest rate of 5%, which were fully repaid during the nine months ended September 30, 2020.
---	---
(iii)	The balance mainly represents amounts due from or advances made to equity investees for content distribution service and other services.
---	---
(iv)	The balance represents prepaid licensed copyrights for the Group’s equity investees.
---	---
(v)	The total outstanding balance represents an interest-free loan of RMB50,000, which is due on demand and an interest-free loan of RMB650,000 provided by Baidu in January 2018 that will mature in January 2023.
---	---
(vi)	The balance mainly represents amounts owed to Baidu for provision of bandwidth and cloud services.
---	---
(vii)	The balance represents deferred revenue in relation to content distribution, licenses of intellectual property and traffic support services to be provided to an equity investee.
---	---
(viii)	The balance mainly represents amounts owed to the Group’s equity investees for licensed copyrights and advances made for online advertising services.
---	---

F-30

iQIYI, INC.

NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”),

except for number of shares (or ADS) and per share (or ADS) data)

15. FAIR VALUE MEASUREMENTS

The following table sets forth the financial instruments measured at fair value on a recurring basis by level within the fair value hierarchy as of December 31, 2019 and September 30, 2020 and on a non-recurring basis as of December 31, 2019 and September 30, 2020:

		Fair Value Measurements
	Quoted Prices in<br> Active Market<br> for Identical Assets<br> (Level 1)	Significant Other<br> Observable Inputs<br> (Level 2)		Significant<br> Unobservable Inputs<br> (Level 3)		Total Gain/(Losses)
	RMB	RMB		RMB		RMB			US
Recurring
As of December 31, 2019:
Short-term investments
Available-for-sale<br> debt securities			890,459
Held-to-maturity<br> debt securities			3,688,854
Long-term investments
Available-for-sale<br> debt security					10,259
Held-to-maturity<br> debt securities			490,799
Prepayment and other assets
Option to purchase equity interests of a listed company					14
Convertible senior notes			14,142,006
As of September 30, 2020:
Short-term investments
Available-for-sale<br> debt securities			791,593
Held-to-maturity<br> debt securities			2,812,298
Long-term investments
Held-to-maturity<br> debt securities			495,533
Convertible senior notes			13,280,458
Non-recurring
As of December 31, 2019:
Long-term investments					—		(169,374	)
Intangible assets, net					72,302		(99,096	)
Equity investments at fair value without readily determinable fair value					44,198		7,024
As of September 30, 2020:
Long-term investments					—		(73,199	)		)
Equity investments at fair value without readily determinable fair value					101,594		38,100
Fixed assets					—		(95,111	)		)
Prepayments and other assets					110,000		(48,423	)		)

All values are in US Dollars.

F-31

iQIYI, INC.

NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”),

except for number of shares (or ADS) and per share (or ADS) data)

		Fair Value Measurements
	Quoted Prices in<br> Active Market<br> for Identical Assets<br> (Level 1)	Significant Other<br> Observable Inputs<br> (Level 2)	Significant<br> Unobservable Inputs<br> (Level 3)		Total Gain/(Losses)
	RMB	RMB	RMB		RMB			US
Mainland China film group – Licensed copyrights as of March 31, 2020				7,186,037		(390,299	)		)
Mainland China film group – Produced content as of March 31, 2020				4,124,114		(209,701	)		)
Produced content monetized on its own				29,907		(186,933	)		)

All values are in US Dollars.

Recurring

As of September 30, 2020, the Group estimated the fair value of the long-term hel d -to-maturity debt securities using the income approach, based on quoted market interest rates of similar instruments (Level 2). As the short-term investments usually have original maturities of less than one year , the carrying values approximate their fair values.

The Company carries the convertible senior notes at face value less unamortized debt discount and issuance costs on its condensed consolidated balance sheets and presents the fair value for disclosure purposes only. The fair value of the convertible senior notes (Note 8) is classified as Level 2 fair value measurements based on dealer quotes.

Non-recurring

The Group measures certain financial assets, including equity method investments at fair value on a non-recurring basis only if an impairment charge were to be recognized. For equity investments accounted for under the measurement alternative, the equity investment is measured at fair value on a nonrecurring basis when there is an orderly transaction for identical or similar investments of the same issuer. The fair values of these investments were categorized as Level 3 in the fair value hierarchy. The fair values of the Group’s privately held investments as disclosed are determined based on the observable transaction price of recent rounds of financing and a price adjustment for the different rights and obligations between a similar instrument of the same issuer with an observable price change in an orderly transaction and the investment held by the Group. The Group’s long-term investments were determined to be impaired as of March 31, 2020 and June 30, 2020, respectively, and the impairment charges were recognized in the condensed consolidated statement of comprehensive loss for the nine months ended September 30, 2020.

The Group uses an income approach to determine the fair value of mobile games in development with the assistance of an independent third-party valuation firm. Judgments involved in determining the fair value of mobile games in development includes forecasts of future cash flows, which are based on the Group’s best estimate of expected revenues and operating costs and expenses, working capital levels, as well as the risk-adjusted discount rate determined based on comparable companies operating in similar businesses and adjusted for an appropriate risk premium for the related asset (Level 3).

In the third quarter of 2020, the Group received a unilateral vacancy notice from a third-party lessor for one of its leased film production premises. The Group considered such notice as an impairment indicator for relevant long-lived assets associated with the leased property, including its related construction in process and leasehold improvements. Therefore, the Group performed an impairment assessment of the relevant long-lived assets based on estimates of the future cash flows that can be recovered from the lessor. An impairment charge of RMB143,534 (US$21,140) was recognized as “selling, general and administrative” in the condensed consolidated statement of comprehensive loss for the nine months ended September 30, 2020.

F-32

iQIYI, INC.

NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”),

except for number of shares (or ADS) and per share (or ADS) data)

The outbreak of coronavirus (COVID-19) during the first quarter of 2020 has negatively impacted the Group’s operations and financial performance and resulted in a downward adjustment to forecasted advertising revenues for the Mainland China film group. As a result, the Group performed an assessment to determine whether the fair value of the Mainland China film group was less than its unamortized film costs as of March 31, 2020 with the assistance of a third-party valuation firm. The fair value of the Mainland China film group was less than its corresponding carrying value and resulted in the Group recognizing an impairment charge of RMB390,299 (US$57,485) related to licensed copyrights and RMB209,701 (US$30,886) related to produced content, respectively. The impairment charge was recognized as cost of revenues in the condensed consolidated statement of comprehensive loss for the nine months ended September 30, 2020. The valuation technique and significant unobservable inputs (Level 3) utilized to determine the fair value of the Mainland China film group are as follows:

Asset	Valuation technique	Unobservable inputs	Range
Mainland China film group	Discounted cash flow	Costs and operating expenses attributable to the film group as a percentage of revenue	32%-37%
		Discount rate	15%

In addition, due to adverse changes in the expected performance of certain produced content and the reduced amount of ultimate revenue expected to be recognized, the Group performed an assessment to determine whether the fair value was less than unamortized content costs. The Group uses a discounted cash flow approach to estimate the fair value of the produced content titles predominantly monetized on its own. The significant unobservable inputs (level 3) include forecasted future revenues, productions costs required to complete the content and exploitation and participation costs. The Group considers historical performance of similar contents, the forecasted performance and/or preliminary actual performance subsequent to release of the produced content in estimating the fair value. An impairment charge of RMB186,933 (US$27,532) was recognized for produced content predominantly monetized on its own and was recognized as cost of revenues in the condensed consolidated statement of comprehensive loss for the nine months ended September 30, 2020.

16. ACCUMULATED OTHER COMPREHENSIVE INCOME

The changes in accumulated other comprehensive income by component, net of tax, for the nine months ended September 30, 2019 and 2020 are as follows:

	Foreign currency<br> translation<br> adjustment			Unrealized gain on<br> <br>available-for-sale debt<br><br> securities			Total
	RMB			RMB			RMB
Balance at December 31, 2018		1,879,171			775			1,879,946
Other comprehensive income before reclassification		613,424			6,855			620,279
Amounts reclassified from accumulated other comprehensive income		—			(7,137	)		(7,137	)
Net current-period other comprehensive income/(loss)		613,424			(282	)		613,142
Other comprehensive (income)/loss attributable to noncontrolling interests		(1,145	)		38			(1,107	)
Balance at September 30, 2019		2,491,450			531			2,491,981
		Unrealized gain on<br> <br>available-for-sale debt<br><br> securities			Total
---	---	---	---	---	---	---	---
		RMB			RMB
Balance at December 31, 2019	2,106,219		499			2,106,718
Other comprehensive income before reclassification	166,781		11,254			178,035
Amounts reclassified from accumulated other comprehensive income	—		(11,569	)		(11,569	)
Net current-period other comprehensive income/(loss)	166,781		(315	)		166,466
Other comprehensive loss attributable to noncontrolling interests	1,088		4			1,092
Balance at September 30, 2020	2,274,088		188			2,274,276
Balance at September 30, 2020, in US	334,937		28			334,965

All values are in US Dollars.

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iQIYI, INC.

NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”),

except for number of shares (or ADS) and per share (or ADS) data)

The amounts reclassified out of accumulated other comprehensive income represent realized gains on the available-for-sale debt securities upon their maturity. Losses on intracompany foreign currency transactions that are of a long-term-investment nature in the amount of nil and RMB471,751 (US$69,481) are included in the foreign currency translation adjustment for the nine months ended September 30, 2019 and September 30, 2020, respectively.

The following table sets forth the tax benefit/(expense) allocated to each component of other comprehensive income for the nine months ended September 30, 2019 and 2020:

	For the nine months ended September 30,
	2019			2020			2020
	RMB			RMB			US
Unrealized gains on <br>available-for-sale<br> debt securities
Other comprehensive income before reclassification		(1,174	)		(2,105	)		)
Amounts reclassified from accumulated other comprehensive income		1,246			2,145
Net current-period other comprehensive income		72			40

All values are in US Dollars.

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