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IPO Statistics &

Readiness Discussion

ASC 606 (IFRS 15) Adoption Trends

SEC Comment Letters, SAB 74 Disclosures, Early Adopters

January 2018


Executive Summary

1


➢ Connor Group has reviewed SEC comment letters issued to date as of December 29, 2017 regarding the adoption or

implementation of ASC 606 Revenue from Contracts with Customers (or its IFRS equivalent, IFRS 15).

➢ This population of relevant SEC comment letters was determined and the filings were retrieved via searches within

CompanyIQ™¹ based on the following criteria:

• SEC Comment letters issued and closed as of December 29, 2017. Please note that SEC only publishes

comment letters that have been fully addressed and closed.

• Comment letter language includes “Topic 606”, “ASC 606” or “ASU 2014-09”.

A total of 31 companies have been issued comment letters, 4 of which are early adopters of the new revenue standard.

Those comment letters contain 42 comments pertaining to either the adoption or implementation of the standard.

➢ A summary of the findings is presented below:

a) Over half of the comments request companies to expand their disclosures related to the evaluation and

implementation status.

b) For companies that are yet to adopt the standard, no comments were noted concerning specific technical

issues in SAB 74 disclosures.

c) On the other hand, in letters to early adopters, comments consist of both inquiries about rationale in reaching

certain technical conclusions and requests to expand disclosure for specific technical areas. Those account for

35% of the total comments reviewed. Notable ones include:

❖ Disclose why cost-to-cost measure is a faithful depiction of transfer of control

❖ Disclose significant payment terms and how the timing of satisfaction of performance obligations relates

to the timing of payment and the effect on the contract asset and liability balances

❖ Whether a significant financing component exists in certain long-term arrangements

❖ Rationale for concluding point-in-time recognition for customized construction contracts

2SEC Comment Letters

¹ CompanyIQ™ is a product of (http://www.mylogiq.com/), a provider of SEC compliance and public company intelligence products. CompanyIQ™ identifies, extracts,

and collates information from relevant public sources to create an 360° company profile and access SEC disclosures and SEC comments linked with responses.

http://www.mylogiq.com/


➢ This disclosure study is intended to provide an overview of current disclosures made by large US-listed companies regarding the upcoming

or recent adoption of ASC 606 Revenue from Contracts with Customers (or its IFRS equivalent, IFRS 15). This is our fifth disclosure study

on the topic. The last study was completed in August 2017.

➢ This study was conducted in December 2017 based on disclosures in SEC filings of 324 companies (304 companies filing using US GAAP,

and 20 using IFRS). This population was determined and the filings were retrieved via searches within CompanyIQ™ based on

the following criteria:

• Companies with market capitalization over $10 billion at the later of (a) companies’ most recent fiscal year end or (b) June

30, 2017

• A Form 10-Q, 10-K, 20-F or 6-K was filed from August 10, 2017 to November 9, 2017.

• Disclosure language includes “revenue from contracts with customers” or “new revenue standard”.

• All industries except finance, insurance, real estate, oil and gas, and mining

Following the same sampling methodology above, the populations for our November 2016, March 2017, May 2017 and August 2017,

studies were 257, 319, 370, and 378 companies, respectively.

➢ A summary of the findings is presented below:

a) Over 80% of the companies sampled have elected an adoption method and 74% have indicated, on a high-level, whether

the adoption will have a material impact or not. These percentages improved by 15~20% since our last study. However,

given the limited time remaining to adopt for calendar year-end companies, a significant amount of work seems to remain.

b) Among the companies that have disclosed their adoption method, 80% have elected the modified retrospective, with 3

companies that previously elected the full method having switched to the modified method.

c) Companies that have early adopted the standard are Alphabet, Diageo, General Dynamics, Ford Motor, Microsoft, Raytheon

and Workday. Analog Devices has also decided to early adopt in November 2017.

d) Only 5% of the companies sampled have disclosed that the adoption will have a material impact. Almost 70% of the

companies do not anticipate a material impact. Vast majority of the companies are yet to quantify the aggregate adoption

impact.

➢ The study includes a list of early adopters and links to their most recent SEC filings. Additionally, disclosure examples from notable early

adopters (e.g. Alphabet, Ford, Workday, Microsoft, etc.) and select companies from all industries studied (e.g. GE, Cisco, Best Buy, etc.)

with varying levels of quantitative and/or qualitative details have been included.

3SAB 74 Disclosures


List of Early Adopters4

❖ Below list includes companies that have adopted ASC 606 (IFRS 15) as of their most recent SEC filing date.

❖ This list is identified through key word search within SEC.gov and CompanyIQ™ and therefore might

not represent the complete population of early adopters.

# Company Name Adoption Date Adoption Method IndustryLink to most

recent filing

1 Alphabet, Inc. March 30, 2017 Modified Technology 10-Q

2 AquaBounty Technologies, Inc March 15, 2017 No historical revenue Life science S-1

3 Aradigm Corporation April 1, 2016 Modified Life science 10-Q

4 Bsquare Corporation March 7, 2016 Modified Technology 10-Q

5Catabasis

Pharmaceuticals, Inc.January 1, 2017 No historical revenue Life science 10-Q

6 CBOE Holdings, Inc. January 1, 2017 Full Finance, Insurance & Real Estate 10-Q

7 Commvault Systems, Inc April 1, 2017 Full Technology 10-Q

8 Ecoark Holdings, Inc April 1, 2017 Modified Consumer products 10-Q

9 Ener-Core, Inc January 1, 2017 No historical revenueIndustrial products, chemicals, and

manufacturing10-Q

10 EnerNoc, Inc. January 1, 2017 Modified Technology 10-Q

11 Extreme Networks, Inc July 1, 2017 Full Technology 10-Q

12 First Solar, Inc. January 1, 2017 Full Technology 10-Q

13 Ford Motor Company January 1, 2017 ModifiedIndustrial products, chemicals, and

manufacturing10-Q

14 General Dynamics Corporation January 1, 2017 FullIndustrial products, chemicals, and

manufacturing10-Q

15 Lipocine, Inc. January 1, 2017 No historical revenue Life science 10-Q

https://www.sec.gov/Archives/edgar/data/1652044/000165204417000042/goog10-qq32017.htm

https://www.sec.gov/Archives/edgar/data/1603978/000119312518008598/d489530ds1a.htm

https://www.sec.gov/Archives/edgar/data/1013238/000119312517333059/d443933d10q.htm

https://www.sec.gov/Archives/edgar/data/1054721/000156459017022241/bsqr-10q_20170930.htm

https://www.sec.gov/Archives/edgar/data/1454789/000110465917067354/a17-20619_110q.htm

https://www.sec.gov/Archives/edgar/data/1374310/000137431017000033/cboe10-qq32017.htm

https://www.sec.gov/Archives/edgar/data/1169561/000116956117000038/a2017093010q.htm

https://www.sec.gov/Archives/edgar/data/1437491/000121390017011607/f10q0917_ecoarkholdings.htm

https://www.sec.gov/Archives/edgar/data/1495536/000121390017012364/f10q0917_enercoreinc.htm

https://www.sec.gov/Archives/edgar/data/1244937/000124493717000049/q12017enoc.htm

https://www.sec.gov/Archives/edgar/data/1078271/000156459017023316/extr-10q_20170930.htm

https://www.sec.gov/Archives/edgar/data/1274494/000127449417000045/fslr10-q09x30x17.htm

https://www.sec.gov/Archives/edgar/data/37996/000003799617000092/f0930201710-q.htm

https://www.sec.gov/Archives/edgar/data/40533/000004053317000043/gd-2017100110q.htm

https://www.sec.gov/Archives/edgar/data/1535955/000114420417057030/tv477771_10q.htm


List of Early Adopters (Cont’d)5

# Company Name Adoption Date Adoption Method IndustryLink to most

recent filing

16 Microsoft Corporation July 1, 2017 Full Technology 10-Q

17 Mirati Therapeutics, Inc. January 1, 2017 No historical revenue Life science 10-Q

18 Nutanix, Inc. August 1, 2017 Full Technology 10-Q

19 Pluristem Therapeutics, Inc. July 1, 2017 Modified Life science 10-Q

20 Power Integrations, Inc. January 1, 2017 Full Technology 10-Q

21 Pure Cycle Corporation September 1, 2017 Modified Transportation and utilities 10-Q

22 R1 RCM Inc. January 1, 2017 ModifiedWholesale/retailer trade,

services and others10-Q

23 Radius Health, Inc. April 1, 2017 No historical revenue Life science 10-Q

24 Raytheon Company January 1, 2017 FullIndustrial products, chemicals,

and manufacturing10-Q

25 Sage Therapeutics, Inc. January 1, 2017 No historical revenue Life science 10-Q

26 Solid Biosciences, Llc January 1, 2017 No historical revenue Life science S-1

27 Strongbridge Bipharma April 1, 2017 No historical revenue Life science 6-K

28 Tesaro, Inc. January 1, 2017 Full Life science 10-Q

29Ultragenyx Pharmaceutical,

Inc.January 1, 2017 Full Life science 10-Q

30 UnitedHealth Group January 1, 2017 ModifiedFinance, Insurance & Real

Estate10-Q

31Vanguard Natural Resources,

IncAugust 1, 2017 Modified

Oil, mining and other energy

related10-Q

32 Workday, Inc. February 1, 2017 Full Technology 10-Q

33 Zafgen, Inc January 1, 2017 No historical revenue Life science 10-Q

https://www.sec.gov/Archives/edgar/data/789019/000156459017020171/msft-10q_20170930.htm

https://www.sec.gov/Archives/edgar/data/1576263/000162828017010533/mrtx-20170930x10q.htm

https://www.sec.gov/Archives/edgar/data/1618732/000161873217000189/ntnx-10312017x10qxq1x18.htm

https://www.sec.gov/Archives/edgar/data/1158780/000117891317003061/zk1720709.htm

https://www.sec.gov/Archives/edgar/data/833640/000083364017000198/powi-2017930x10q.htm

https://www.sec.gov/Archives/edgar/data/276720/000165495418000232/pcyo_10q.htm

https://www.sec.gov/Archives/edgar/data/1472595/000147259517000112/q3201710q.htm

https://www.sec.gov/Archives/edgar/data/1428522/000162828017010726/rdus0930201710-q.htm

https://www.sec.gov/Archives/edgar/data/1047122/000104712217000171/rtn-10012017x10q.htm

https://www.sec.gov/Archives/edgar/data/1597553/000156459017020982/sage-10q_20170930.htm

https://www.sec.gov/Archives/edgar/data/1707502/000119312517383428/d404258ds1.htm

https://www.sec.gov/Archives/edgar/data/1634432/000155837017006055/sbbp-20170630x6k.htm

https://www.sec.gov/Archives/edgar/data/1491576/000155837017008418/tsro-20170930x10q.htm

https://www.sec.gov/Archives/edgar/data/1515673/000156459017021336/rare-10q_20170930.htm

https://www.sec.gov/Archives/edgar/data/731766/000073176617000045/unh930201710-q.htm

https://www.sec.gov/Archives/edgar/data/1384072/000138407217000152/vnr2017q310-q.htm

https://www.sec.gov/Archives/edgar/data/1327811/000132781117000032/wday-10312017x10q.htm

https://www.sec.gov/Archives/edgar/data/1374690/000119312517335910/d395476d10q.htm


SEC Comment Letters

ASC 606 (IFRS 15) Adoption and

Implementation

6


Type 2: SEC inquiries to early adopters cover the following areas:

❖ Rationale for why certain promise is not distinct

❖ Considerations in making judgement about contract combination

or modification (with request to expand disclosure)

❖ Rationale for significant financing component conclusion

❖ Justification of selected measure of progress (with request to

expand disclosure)

❖ Rationale for point-in-time recognition for customized

construction contracts (with request to expand disclosure)

❖ Rationale for concluding certain consideration payable to

customers not accounted for as a reduction of revenue

❖ Expand disclosures about (a) significant payment terms and the

relation between payment timing and satisfaction of

performance obligation and contract balances, (b) variable

consideration, (c) remaining performance obligations, (d)

balances of capitalized costs to obtain a contract

7SEC Comments by Type

Type 3: Minor corrections requested(e.g. required adoption date):10% (4/42 comments)

Type 2: Comments for early adopters: 35% (15/42 comments)

Type 1: Request to expand evaluation and implementation status: 55% (23/42 comments)

Type 1: A typical example comment is as follows,

Please revise to provide qualitative financial statement disclosures of the

potential impact that this standard will have on your financial statements

when adopted. In this regard, include a description of the effects of the

accounting policies that you expect to apply, if determined, and a

comparison to your current revenue recognition policies. Describe the

status of your process to implement the new standard and the significant

implementation matters yet to be addressed. In addition, to the extent that

you determine the quantitative impact that adoption of Topic 606 is

expected to have on your financial statements, please also disclose such

amounts. Please refer to ASC 250-10-S99-6 and SAB Topic 11.M.


Comment Letter Examples8

Company Name Response Date Link to response letter and Question #

1. First Data Corp April 17, 2017 Question 5

2. NASDAQ, Inc April 13, 2017 Question 1

❖ Example of Type 1 - Request to expand evaluation and implementation status

❖ Other companies received similar Type 1 comments:

✓ Mastec, Inc.

✓ Legget & Platt, Inc.

✓ Monster Beverage Corp

✓ IAC/InterActive Corp

✓ ONEOK Partners LP

✓ Vermillion, Inc.

✓ ONEOK, Inc.

✓ MKS Instruments, Inc.

✓ Guaranty Bancshares, Inc.

✓ United Therapeutics Corp

✓ Community Health Systems, Inc.

✓ Integer Holdings Corporation

✓ Ctrip.com International, Ltd

✓ Roku, Inc.

✓ Snap, Inc.

✓ Black Knight, Inc.

✓ SenesTech, Inc.

✓ Altice USA, Inc.

✓ RYB Education, Inc.

✓ AGM Group Holdings, Inc.

✓ Co-Diagnostics, Inc.

https://www.sec.gov/Archives/edgar/data/883980/000162828017003668/filename1.htm



Comment Letter Examples (Cont’d)9


1. General Dynamics CorpSeptember 7, 2017 Question 1 - 6

October 19, 2017 Question 1

2. First Solar, Inc. August 17, 2017 Question 7 - 10

3. Workday, Inc. August 8, 2017 Question 1 - 2

4. CBOE Global Markets, Inc. September 1, 2017 Question 1 - 2

❖ Full list of Type 2 – Comments to early adopters


1. BioLargo, Inc. March 30, 2017 Question 17

2. Veritone, Inc. March 15, 2017 Question 3

3. BeautyKind Holdings, Inc. April 1, 2016 Question 12

4. QMC Systems, Inc. March 7, 2016 Question 4*

❖ Full list of Type 3 – Minor corrections requested

❖ * Response letter to this SEC letter is not available on SEC.gov as of the date of this study.









https://www.sec.gov/Archives/edgar/data/1642223/000000000016067458/filename1.pdf


SAB 74 Disclosure Trend

ASC 606 (IFRS 15)

Methods, Dates, and Anticipated Impact

10


11Sampled Companies by Industry

90

5852

3631 30

27

0

20

40

60

80

100

a b c d e f g

16%

11%10%

9%8%

28%

18%

From left to right:

a. Transportation and utilities

b. Technology

c. Industrial products, chemicals and manufacturing

d. Life sciences (biotechnology, pharmaceuticals, medical devices)

e. Wholesale, retail, services and other

f. Consumer products

g. Entertainment, media and communications


12Anticipated Adoption Method

4% 5%

91%

11%

29%

60%

14%

34%

52%

17%

49%

34%

18%

65%

17%

0%

20%

40%

60%

80%

100%

Full Retrospective Modified Retrospective Still Assessing

Nov'16 Study Mar'17 Study May'17 Study Aug'17 Study Dec'17 Study (Current)

▪ 59/324 companies

▪ Notable companies:

- Raytheon (adopted)

- General Dynamics (adopted)

- Workday (adopted)

- Microsoft (adopted)

- Apple

- GE

- Oracle

- Boeing

- American Airline

- Intuitive Surgical



- Alphabet (adopted)

- Ford (adopted)

- Nike

- Amazon

- AT&T

- Facebook

- Priceline

- IBM

- Dow Chemical

- AbbVie

Full Retrospective = recast all comparative periods presented in the post-adoption financial statements; Modified Retrospective = cumulative-effect

adjustment to retained earnings in the period of adoption for prior periods’ effects

The percentage of companies that have determined an adoption method has increased by 17% since our last study. Approximately 80% of the companies

that disclosed an adoption method have elected to use the modified retrospective method.

Three companies (Netflix, International Paper, and Sherwin-Williams) have switched the adoption method previously elected from full retrospective to

modified retrospective over the past two quarters. 1 company (Yum! Brands) has switched from full retrospective to still assessing. Some companies who

have elected full retrospective have continued to indicate that their ability to apply full retrospective method depends on system readiness and the completion

of the analysis of information necessary to restate prior periods.

There are 16 companies that expect a material adoption impact and also have elected an adoption method. Over 60% of them (10 companies) have chosen

the full retrospective. On the other hand, there are 199 companies that expect that the adoption will not be material and also have determined an adoption

method. Over 80% of them (161 companies) have chosen the modified retrospective.

For early adopters, 5 out of 7 companies elected the full retrospective method.

▪ 56/324

companies


13Anticipated Adoption Date

2%

35%

63%

2%

85%

13%

2%

93%

5%2%

96%

2%2%

97%

1%0%

20%

40%

60%

80%

100%

120%

Early Adoption Standard Adoption Not Specified

Nov'16 Study Mar'17 Study May'17 Study Aug'17 Study Dec '17 Study (Current)

▪ 7/324 companies:

- Alphabet (adopted)

- General Dynamics (adopted)

- Ford (adopted)

- Raytheon (adopted)

- Workday (adopted)

- Microsoft (adopted)

- Analog Devices (early adopt in Nov. 17)


7 companies that issued SEC filings during our current study date range have elected to early adopt the new standard. Among the 6

companies that have adopted the standard, 5 of them disclosed an immaterial impact.

The “not specified” group has decreased by 1% since our last study. This is an expected trend as currently the early adoption is essentially

only available for a small subset of companies that have an off-calendar year-end date.

Among the 315 companies within the “standard adoption” group,

▪ 66% (209 companies, comprising of 68% of US GAAP companies sampled and 10% of IFRS companies sampled) have disclosed both

the high-level adoption impact and an adoption method. This percentage has increased by 15~20% per quarter for the past 2 quarters.

▪ 9% (28 companies, comprising of 6% of US GAAP companies sampled and 50% of IFRS companies sampled) have not determined the

high-level adoption impact nor an adoption method. Such percentage has decreased by approximately 10~15% per quarter for the past 2

quarters.

▪ 2/324

companies


14Anticipated Adoption Impact

4%9%

87%

8%

42%

50%

6%

43%

51%

5%

54%

41%

5%

69%

26%

0%

20%

40%

60%

80%

100%

Material Not Material Still Assessing

Nov'16 Study Mar'17 Study May'17 Study Aug'17 Study Dec'17 Study (Current)



- Boeing

- T-Mobile

- American Airlines

- Hilton Worldwide Holdings

- Electronic Arts



- IBM

- Procter & Gamble

- Amgen

- Best Buy

- Johnson & Johnson

Overall, we have seen progress in companies’ disclosures about high-level adoption impacts. Additionally, discussions about specific impacted

areas or revenue streams have been enhanced in many cases.

25% of the IFRS companies sampled and 77% of the US GAAP companies sampled have discussed their preliminary conclusion as to

whether they anticipate a significant adoption impact.

In addition, for the “still assessing” group, 52% (44 companies) have elected the modified retrospective method and 13% (11 companies) have

elected the full retrospective method. Compared with our last study, the percentage for the modified retrospective group has increased by over

10% while that percentage for full retrospective group remains the same.

Vast majority of the companies sampled are yet to disclose quantitative adoption impact. A small number of companies have started to include

estimated quantitative impact in the MD&A section.

Companies continue to caveat their potential impact disclosures that the company’s current assessment is preliminary, still ongoing, and

subject to change.

Please refer to Exhibit II “Common Impact Areas and Illustrative Pre-adoption Disclosures” for common adoption impact areas by industry.

▪ 85/324

companies


Top 15 Technology Companies15

Adoption Impact

Ad

op

tio

n M

eth

od

Full

Retrospective Salesforce

Apple

Oracle Microsoft (Adopted)

Modified

Retrospective

Intel

Priceline

Alphabet (Adopted)

Facebook

IBM

Accenture

Cisco Systems

Texas Instruments

Netflix

Not

Specified

NTT DoCoMo

Taiwan

Semiconductor

Manufacturing Co

Not

SpecifiedImmaterial Material

▪ Top 15 technology companies were selected based on market capitalization at the later of (a) companies’ most recent fiscal year

end or (b) June 30, 2017 (Source: MyLogIQ)

▪ 3 more companies have moved into the dot-shaded zone (right top corner) since our last study.


Top 15 Life Sciences Companies16

Adoption Impact

Ad

op

tio

n M

eth

od

Full

Retrospective

Modified

Retrospective

Abbott Laboratories

AbbVie

Allergan

Amgen

Celgene

Eli Lily

Gilead Sciences

Johnson & Johnson

3M

Merck

Pfizer

Medtronic

Biogen

Bristol Myers

Squibb

Not

Specified GlaxoSmithKline

Not

SpecifiedImmaterial Material

▪ Top 15 life science companies were selected based on market capitalization at the later of (a) companies’ most recent fiscal year

end or (b) June 30, 2017 (Source: MyLogIQ)

▪ 3 more companies have moved into the dot-shaded zone (top right corner) since our last study.


Summary of Exhibits17

Description Link

❖ Post-adoption Disclosures Examples

1. Alphabet (modified retrospective, third Form 10-Q filed after adoption) Exhibit I - 1

2. Ford (modified retrospective, third Form 10-Q filed after adoption) Exhibit I – 2

3. General Dynamics (full retrospective, third Form 10-Q filed after adoption) Exhibit I – 3

4. Workday (full retrospective, second Form 10-Q filed after adoption) Exhibit I - 4

5. Microsoft (full retrospective, first Form 10-Q filed after adoption) Exhibit I - 5

❖ Common Impact Areas and Illustrative Pre-adoption Disclosures

AA. All industries Exhibit II

A. Technology Exhibit II - A

B. Industrial products, chemicals, and manufacturing Exhibit II – B

C. Transportation and utilities Exhibit II – C

D. Life sciences (biotechnology, pharmaceuticals, medical devices) Exhibit II – D

E. Entertainment, media and communications Exhibit II – E

F. Wholesale, retail, services and other Exhibit II – F

G. Consumer products Exhibit II - G

Disclosure Example Color Legend: Adoption date or method; Adoption impact; Other Topic 606 related disclosures


18

Exhibit I – Post-adoption Disclosure Examples


19Exhibit I – Post-adoption Disclosure

Adoption of ASC Topic 606, "Revenue from Contracts with Customers"

On January 1, 2017, we adopted Topic 606 using the modified retrospective method applied to those contracts which were

not completed as of January 1, 2017. Results for reporting periods beginning after January 1, 2017 are presented under Topic

606, while prior period amounts are not adjusted and continue to be reported in accordance with our historic accounting under

Topic 605.

We recorded a net reduction to opening retained earnings of $15 million as of January 1, 2017 due to the cumulative

impact of adopting Topic 606, with the impact primarily related to our non-advertising revenues. The impact to revenues

as a result of applying Topic 606 was an increase of $10 million and $32 million for the three and nine months

ended September 30, 2017, respectively.

Revenue Recognition

Revenues are recognized when control of the promised goods or services is transferred to our customers, in an amount that

reflects the consideration we expect to be entitled to in exchange for those goods or services.

The following table presents our revenues disaggregated by revenue source (in millions, unaudited). Sales and usage-based

taxes are excluded from revenues:

Back to summary


20Exhibit I – Post-adoption Disclosure (Cont’d)

(1) As noted above, prior period amounts have not been adjusted under the modified retrospective method.

(2) Revenues include hedging gains (losses) of $105 million and $(191) million for the three months ended September 30, 2016 and 2017, respectively, and $352 million and

$29 million for the nine months ended September 30, 2016 and 2017, respectively, which do not represent revenues recognized from contracts with customers.

The following table presents our revenues disaggregated by geography, based on the billing addresses of our customers (in millions,

unaudited):

(1) Regions represent Europe, the Middle East, and Africa (EMEA); Asia-Pacific (APAC); and Canada and Latin America (Other Americas).

(2) Revenues include hedging gains (losses) for the three and nine months ended September 30, 2016 and 2017.

Back to summary



Advertising Revenues

We generate revenues primarily by delivering advertising on Google properties and Google Network Members’ properties.

…...

Most of our customers pay us on a cost-per-click basis (CPC), which means that an advertiser pays us only when a user clicks on

an ad on Google properties or Google Network Members' properties or views certain YouTube ad formats like TrueView. For these

customers, we recognize revenue each time a user clicks on the ad or when a user views the ad for a specified period of time.

We also offer advertising on other bases such as cost-per-impression (CPM), which means an advertiser pays us based on the

number of times their ads are displayed on Google properties or Google Network Members’ properties. For these customers, we

recognize revenue each time an ad is displayed.

Certain customers may receive cash-based incentives or credits, which are accounted for as variable consideration. We

estimate these amounts based on the expected amount to be provided to customers and reduce revenues recognized.

We believe that there will not be significant changes to our estimates of variable consideration.

For ads placed on Google Network Members’ properties, we evaluate whether we are the principal (i.e., report revenues on a gross

basis) or agent (i.e., report revenues on a net basis). Generally, we report advertising revenues for ads placed on Google Network

Members’ properties on a gross basis, that is, the amounts billed to our customers are recorded as revenues, and amounts paid to

publishers are recorded as cost of revenues. Where we are the principal because we control the advertising inventory before

it is transferred to our customers. Our control is evidenced by our sole ability to monetize the advertising inventory

before it is transferred to our customers, and is further supported by us being primarily responsible to our customers and

having a level of discretion in establishing pricing.

Back to summary



Other Revenues

……

As it relates to Google other revenues, the most significant judgment is determining whether we are the principal or agent for app

sales and in-app purchases through the Google Play store. We report revenues from these transactions on a net basis

because our performance obligation is to facilitate a transaction between app developers and end users, for which we

earn a commission. Consequently, the portion of the gross amount billed to end users that is remitted to app developers is not

reflected as revenues.

Arrangements with Multiple Performance Obligations

Our contracts with customers may include multiple performance obligations. For such arrangements, we allocate revenue to each

performance obligation based on its relative standalone selling price. We generally determine standalone selling prices based

on the prices charged to customers or using expected cost plus margin.

Deferred Revenues

We record deferred revenues when cash payments are received or due in advance of our performance, including amounts which

are refundable. The increase in the deferred revenue balance for the nine months ended September 30, 2017 is primarily

driven by cash payments received or due in advance of satisfying our performance obligations, offset by $779 million of

revenues recognized that were included in the deferred revenue balance as of December 31, 2016.

Our payment terms vary by the type and location of our customer and the products or services offered. The term between invoicing

and when payment is due is not significant. For certain products or services and customer types, we require payment before the

products or services are delivered to the customer.

Back to summary



Practical Expedients and Exemptions

We generally expense sales commissions when incurred because the amortization period would have been one year or

less. These costs are recorded within sales and marketing expenses.

We do 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 we recognize revenue at the amount to which we have the right to invoice for

services performed.

Back to summary

[Emphasis added]



NEW ACCOUNTING STANDARDS

ASU 2014-09, Revenue - Revenue from Contracts with Customers. On January 1, 2017, we adopted the new accounting

standard ASC 606, Revenue from Contracts with Customers and all the related amendments (“new revenue standard”) to

all contracts using the modified retrospective method. We recognized the cumulative effect of initially applying the new

revenue standard as an adjustment to the opening balance of retained earnings. The comparative information has not been

restated and continues to be reported under the accounting standards in effect for those periods. We expect the impact of the

adoption of the new standard to be immaterial to our net income on an ongoing basis.

A majority of our sales revenue continues to be recognized when products are shipped from our manufacturing facilities. For

certain vehicle sales where revenue was previously deferred, such as vehicles subject to a guaranteed resale value

recognized as a lease and transactions in which a Ford-owned entity delivered vehicles, we now recognize revenue when

vehicles are shipped.

……

The cumulative effect of the changes made to our consolidated January 1, 2017 balance sheet for the adoption of ASU 2016-09,

Stock Compensation - Improvements to Employee Share-Based Payment Accounting and ASU 2014-09, Revenue - Revenue from

Contracts with Customers were as follows (in millions):

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In accordance with the new revenue standard requirements, the disclosure of the impact of adoption on our consolidated income

statement and balance sheet for the periods ended September 30, 2017 was as follows (in millions):

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REVENUE

The following table disaggregates our revenue by major source for the periods ended September 30, 2017 (in millions):

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REVENUE

The following table disaggregates our revenue by major source (in millions):

Revenue is recognized when obligations under the terms of a contract with our customer are satisfied; generally this

occurs with the transfer of control of our vehicles, parts, accessories, or services. Revenue is measured as the amount of

consideration we expect to receive in exchange for transferring goods or providing services. Sales, value add, and other

taxes we collect concurrent with revenue-producing activities are excluded from revenue. Incidental items that are

immaterial in the context of the contract are recognized as expense. The expected costs associated with our base warranties and

field service actions continue to be recognized as expense when the products are sold (see Note 16). We recognize revenue for

vehicle service contracts that extend mechanical and maintenance beyond our base warranties over the life of the contract. We do

not have any material significant payment terms as payment is received at or shortly after the point of sale.

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REVENUE

Automotive Segment

Vehicles, Parts, and Accessories. For the majority of vehicles, parts, and accessories, we transfer control and recognize a sale when

we ship the product from our manufacturing facility to our customer (dealers and distributors). We receive cash equal to the

invoice price for most vehicle sales at the time of wholesale. When the vehicle sale is financed by our wholly-owned

subsidiary Ford Credit, the dealer pays Ford Credit when it sells the vehicle to the retail customer (see Note 8). Payment

terms on part sales to dealers, distributors, and retailers range from 30 days to 120 days. The amount of consideration we

receive and revenue we recognize varies with changes in marketing incentives and returns we offer to our customers and

their customers. When we give our dealers the right to return eligible parts and accessories, we estimate the expected

returns based on an analysis of historical experience. We adjust our estimate of revenue at the earlier of when the most

likely amount of consideration we expect to receive changes or when the consideration becomes fixed. As a result we

recognized an increase to revenue from prior periods in the third quarter of 2017 of $33 million.

Depending on the terms of the arrangement, we may also defer the recognition of a portion of the consideration received because

we have to satisfy a future obligation (e.g., free extended service contracts). We use an observable price to determine the stand-

alone selling price for separate performance obligations or a cost plus margin approach when one is not available. We

have elected to recognize the cost for freight and shipping when control over vehicles, parts, or accessories have

transferred to the customer as an expense in Cost of sales.

We sell vehicles to daily rental companies and guarantee that we will pay them the difference between an agreed amount and the

value they are able to realize upon resale. At the time of transfer of vehicles to the daily rental companies, we record the probable

amount we will pay under the guarantee to Other liabilities and deferred revenue.

Used Vehicles. We sell used vehicles both at auction and through our consolidated dealerships. Proceeds from the sale of these

vehicles are recognized in Automotive revenues upon transfer of control of the vehicle to the customer and the related vehicle

carrying value is recognized in Cost of sales.

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REVENUE

Extended Service Contracts. We sell separately-priced service contracts that extend mechanical and maintenance coverages

beyond our base warranty agreements to vehicle owners. The separately priced service contracts range from 12 months to 120

months. We receive payment at the inception of the contract and recognize revenue over the term of the agreement in proportion to

the costs expected to be incurred in satisfying the obligations under the contract. At January 1, 2017, $3.5 billion of unearned

revenue associated with outstanding contracts was reported in Other Liabilities and deferred revenue, $256 million and

$797 million of this was recognized as revenue during the third quarter and first nine months of 2017, respectively. At

September 30, 2017, the unearned amount was $3.7 billion. We expect to recognize approximately $300 million of the

unearned amount in 2017, $1 billion in 2018, and $2.4 billion thereafter. We record a premium deficiency reserve to the

extent we estimate the future costs associated with these contracts exceed the unrecognized revenue. Amounts paid to

dealers to obtain these contracts are deferred and recorded as Other assets. These costs are amortized to expense

consistent with how the related revenue is recognized. We had a balance of $236 million in deferred costs as of

September 30, 2017 and recognized $17 million and $46 million of amortization during the third quarter and first nine

months of 2017, respectively.

Other Revenue. Other revenue consists primarily of net commissions received for serving as the agent in facilitating the sale of a

third party’s products or services to our customers and payments for vehicle-related design and testing services we perform for

others. We have applied the practical expedient to recognize Automotive revenues for vehicle-related design and testing

services over the two to three year term of these agreements in proportion to the amount we have the right to invoice.

Leasing Income. We sell vehicles to daily rental companies with an obligation to repurchase the vehicles for a guaranteed amount,

exercisable at the option of the customer. The transactions are accounted for as operating leases. Upon the transfer of vehicles to

the daily rental companies, we record proceeds received in Other liabilities and deferred revenue. The difference between the

proceeds received and the guaranteed repurchase amount is recorded in Automotive revenues over the term of the lease using a

straight-line method. The cost of the vehicle is recorded in Net investment in operating leases on our consolidated balance sheet

and the difference between the cost of the vehicle and the estimated auction value is depreciated in Cost of sales over the term of

the lease.

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REVENUE

Financial Services Segment

Leasing Income. Ford Credit offers leasing plans to retail consumers through Ford and Lincoln brand dealers who originate the

leases. Upon the purchase of a lease from the dealer, Ford Credit takes ownership of the vehicle and records an operating lease.

The retail consumer makes lease payments representing the difference between Ford Credit’s purchase price of the vehicle and

the contractual residual value of the vehicle, plus lease fees that we recognize on a straight-line basis over the term of the lease

agreement. Depreciation and the gain or loss upon disposition of the vehicle is recorded in Financial Services interest, operating,

and other expenses.

Financing Income. Ford Credit originates and purchases finance installment contracts. Financing income represents interest

earned on the finance receivables (including direct financing leases). Interest is recognized using the interest method, and includes

the amortization of certain direct origination costs.

Insurance Income. Income from insurance contracts is recognized evenly over the term of the agreement. Insurance commission

revenue is recognized on a net basis at the time of sale of the third party’s product or service to our customer.


[Emphasis added]

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REVENUE

The majority of our revenue is derived from long-term contracts and programs that can span several years. We account for

revenue in accordance with ASC Topic 606, Revenue from Contracts with Customers, which we adopted on January 1,

2017, using the retrospective method. See Note Q for further discussion of the adoption, including the impact on our 2016

financial statements.

Performance Obligations. A performance obligation is a promise in a contract to transfer a distinct good or service to the

customer, and is the unit of account in ASC Topic 606. A contract’s transaction price is allocated to each distinct performance

obligation and recognized as revenue when, or as, the performance obligation is satisfied. The majority of our contracts have a

single performance obligation as the promise to transfer the individual goods or services is not separately identifiable from other

promises in the contracts and, therefore, not distinct. Some of our contracts have multiple performance obligations, most commonly

due to the contract covering multiple phases of the product lifecycle (development, production, maintenance and support). For

contracts with multiple performance obligations, we allocate the contract’s transaction price to each performance obligation using

our best estimate of the standalone selling price of each distinct good or service in the contract. The primary method used to

estimate standalone selling price is the expected cost plus a margin approach, under which we forecast our expected

costs of satisfying a performance obligation and then add an appropriate margin for that distinct good or service.

Contract modifications are routine in the performance of our contracts. Contracts are often modified to account for changes in the

contract specifications or requirements. In most instances, contract modifications are for goods or services that are not distinct,

and, therefore, are accounted for as part of the existing contract.

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REVENUE

Our performance obligations are satisfied over time as work progresses or at a point in time. Revenue from products and services

transferred to customers over time accounted for 70% of our revenue for the three- and nine-month periods ended October 1,

2017, and 72% and 71% of our revenue for the three- and nine-month periods ended October 2, 2016, respectively. Substantially

all of our revenue in the defense groups is recognized over time because control is transferred continuously to our

customers. Typically, revenue is recognized over time using costs incurred to date relative to total estimated costs at

completion to measure progress toward satisfying our performance obligations. Incurred cost represents work

performed, which corresponds with, and thereby best depicts, the transfer of control to the customer. Contract costs

include labor, material, overhead and, when appropriate, G&A expenses.

Revenue from goods and services transferred to customers at a point in time accounted for 30% of our revenue for the three- and

nine-month periods ended October 1, 2017, and 28% and 29% of our revenue for the three- and nine-month periods

ended October 2, 2016, respectively. The majority of our revenue recognized at a point in time is for the manufacture of

business-jet aircraft in our Aerospace group. Revenue on these contracts is recognized when the customer obtains

control of the asset, which is generally upon delivery and acceptance by the customer of the fully outfitted aircraft.

On October 1, 2017, we had $63.9 billion of remaining performance obligations, which we also refer to as total backlog.

We expect to recognize approximately 50% of our remaining performance obligations as revenue by 2018, an

additional 30% by 2020 and the balance thereafter.

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REVENUE

Contract Estimates. Accounting for long-term contracts and programs involves the use of various techniques to estimate total

contract revenue and costs. For long-term contracts, we estimate the profit on a contract as the difference between the total

estimated revenue and expected costs to complete a contract and recognize that profit over the life of the contract.

Contract estimates are based on various assumptions to project the outcome of future events that often span several years. These

assumptions include labor productivity and availability; the complexity of the work to be performed; the cost and availability of

materials; the performance of subcontractors; and the availability and timing of funding from the customer.

The nature of our contracts gives rise to several types of variable consideration, including claims and award and

incentive fees. We include in our contract estimates additional revenue for submitted contract modifications or claims

against the customer when we believe we have an enforceable right to the modification or claim, the amount can be

estimated reliably and its realization is probable. In evaluating these criteria, we consider the contractual/legal basis for

the claim, the cause of any additional costs incurred, the reasonableness of those costs and the objective evidence

available to support the claim. We include award or incentive fees in the estimated transaction price when there is a basis

to reasonably estimate the amount of the fee. These estimates are based on historical award experience, anticipated

performance and our best judgment at the time. Because of our certainty in estimating these amounts, they are included

in the transaction price of our contracts and the associated remaining performance obligations.

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REVENUE

As a significant change in one or more of these estimates could affect the profitability of our contracts, we review and

update our contract-related estimates regularly. We recognize adjustments in estimated profit on contracts under the

cumulative catch-up method. Under this method, the impact of the adjustment on profit recorded to date on a contract is

recognized in the period the adjustment is identified. Revenue and profit in future periods of contract performance are

recognized using the adjusted estimate. If at any time the estimate of contract profitability indicates an anticipated loss

on the contract, we recognize the total loss in the quarter it is identified.

The impact of adjustments in contract estimates on our operating earnings can be reflected in either operating costs and

expenses or revenue. The aggregate impact of adjustments in contract estimates increased our revenue, operating

earnings and diluted earnings per share as follows:

No adjustment on any one contract was material to our unaudited Consolidated Financial Statements for the three- and

nine-month periods ended October 1, 2017, and October 2, 2016.

Revenue by Category. Our portfolio of products and services consists of over 10,000 active contracts. The following series of

tables presents our revenue disaggregated by several categories.

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REVENUE

Revenue by major product line was as follows:

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REVENUE

Revenue by contract type was as follows:

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REVENUE

Revenue by contract type was as follows:

Each of these contract types presents advantages and disadvantages. Typically, we assume more risk with fixed-price

contracts. However, these types of contracts offer additional profits when we complete the work for less than originally

estimated. Cost-reimbursement contracts generally subject us to lower risk. Accordingly, the associated base fees are

usually lower than fees earned on fixed-price contracts. Under time-and-materials contracts, our profit may vary if actual

labor-hour costs vary significantly from the negotiated rates. Also, because these contracts can provide little or no fee for

managing material costs, the content mix can impact profitability.

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REVENUE

Revenue by customer was as follows:

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REVENUE

Revenue by customer was as follows:

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REVENUE

Contract Balances. The timing of revenue recognition, billings and cash collections results in billed accounts receivable,

unbilled receivables (contract assets), and customer advances and deposits (contract liabilities) on the Consolidated

Balance Sheet. In our defense groups, amounts are billed as work progresses in accordance with agreed-upon

contractual terms, either at periodic intervals (e.g., biweekly or monthly) or upon achievement of contractual milestones.

Generally, billing occurs subsequent to revenue recognition, resulting in contract assets. However, we sometimes receive

advances or deposits from our customers, particularly on our international contracts, before revenue is recognized,

resulting in contract liabilities. These assets and liabilities are reported on the Consolidated Balance Sheet on a contract-

by-contract basis at the end of each reporting period. In our Aerospace group, we generally receive deposits from

customers upon contract execution and upon achievement of contractual milestones. These deposits are liquidated when

revenue is recognized. Changes in the contract asset and liability balances during the nine-month period

ended October 1, 2017, were not materially impacted by any other factors.

Revenue recognized for the three- and nine-month periods ended October 1, 2017, and October 2, 2016, that was included

in the contract liability balance at the beginning of each year was $982 and $3.9 billion, and $911 and $3.7 billion,

respectively. This revenue represented primarily the sale of business-jet aircraft.

PRIOR-PERIOD FINANCIAL STATEMENTS

ASC Topic 606. We adopted ASC Topic 606 on January 1, 2017, using the retrospective method. The adoption of ASC

Topic 606 had two primary impacts on our Consolidated Financial Statements. The impact of adjustments on profit

recorded to date is now recognized in the period identified (cumulative catch-up method), rather than prospectively over

the remaining contract term. For our contracts for the manufacture of business-jet aircraft, we now recognize revenue at

a single point in time when control is transferred to the customer, generally upon delivery and acceptance of the fully

outfitted aircraft. Prior to the adoption of ASC Topic 606, we recognized revenue for these contracts at two contractual

milestones: when green aircraft were completed and accepted by the customer and when the customer accepted final

delivery of the fully outfitted aircraft. The cumulative effect of the adoption was recognized as a decrease to retained

earnings of $372 on January 1, 2015.

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ASC Topic 606. We adopted ASC Topic 606 on January 1, 2017, using the retrospective method. The adoption of ASC

Topic 606 had two primary impacts on our Consolidated Financial Statements. The impact of adjustments on profit

recorded to date is now recognized in the period identified (cumulative catch-up method), rather than prospectively over

the remaining contract term. For our contracts for the manufacture of business-jet aircraft, we now recognize revenue at

a single point in time when control is transferred to the customer, generally upon delivery and acceptance of the fully

outfitted aircraft. Prior to the adoption of ASC Topic 606, we recognized revenue for these contracts at two contractual

milestones: when green aircraft were completed and accepted by the customer and when the customer accepted final

delivery of the fully outfitted aircraft. The cumulative effect of the adoption was recognized as a decrease to retained

earnings of $372 on January 1, 2015.

We applied the standard's practical expedient that permits the omission of prior-period information about our remaining

performance obligations. No other practical expedients were applied.

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The following tables summarize the effects of adopting these accounting standards on our unaudited Consolidated Financial

Statements.

Consolidated Statement of Earnings (Unaudited)

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The following tables summarize the effects of adopting these accounting standards on our unaudited Consolidated Financial

Statements.


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Consolidated Statement of Comprehensive Income (Unaudited)

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PRIOR-PERIOD FINANCIAL STATEMENTS Consolidated Balance Sheet (Unaudited)

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PRIOR-PERIOD FINANCIAL STATEMENTS Consolidated Statement of Cash Flow (Unaudited)

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Consolidated Statement of Shareholders’ Equity (Unaudited)

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[Emphasis added]



…… We early adopted the requirements of the new standard as of February 1, 2017, utilizing the full retrospective method

of transition. Adoption of the new standard resulted in changes to our accounting policies for revenue recognition, trade and other

receivables, and deferred commissions as detailed below. We applied the new standard using a practical expedient where the

consideration allocated to the remaining performance obligations or an explanation of when we expect to recognize that

amount as revenue for all reporting periods presented before the date of the initial application is not disclosed.

The impact of adopting the new standard on our fiscal 2017 and fiscal 2016 revenues is not material. The primary impact

of adopting the new standard relates to the deferral of incremental commission costs of obtaining subscription contracts.

Under Topic 605, we deferred only direct and incremental commission costs to obtain a contract and amortized those

costs over the term of the related subscription contract, which was generally three years or longer. Under the new

standard, we defer all incremental commission costs to obtain the contract. We amortize these costs on a straight-line

basis over a period of benefit that we have determined to be five years or the related contractual renewal period,

depending on whether the contract is an initial or renewal contract, respectively.

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We adjusted our condensed consolidated financial statements from amounts previously reported due to the adoption of

ASU No. 2014-09 and ASU No. 2016-18. Select condensed consolidated balance sheet line items, which reflect the

adoption of the new ASU’s are as follows (in thousands):

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Select unaudited condensed consolidated statement of operations line items, which reflect the adoption of the new ASUs

are as follows (in thousands except per share data):

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Select unaudited condensed consolidated statement of cash flows line items, which reflect the adoption of the new ASUs

are as follows (in thousands):

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a. Adjusted to reflect the adoption of ASU No. 2014-09, Revenue from Contracts with Customers.

b. Adjusted to reflect the adoption of ASU No. 2016-18, Statement of Cash Flows, Restricted Cash.

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Summary of Significant Accounting Policies

Revenue Recognition

We derive our revenues primarily from subscription services and professional services. Revenues are recognized when control of

these services is transferred to our customers, in an amount that reflects the consideration we expect to be entitled to in exchange

for those services.

……

Subscription Services Revenues

Subscription services revenues primarily consist of fees that provide customers access to one or more of our cloud applications for

finance, human resources, and analytics, with routine customer support. Revenue is generally recognized over time on a ratable

basis over the contract term beginning on the date that our service is made available to the customer. Our subscription contracts are

generally three years or longer in length, billed annually in advance, and non-cancelable.

Professional Services Revenues

Professional services revenues primarily consist of fees for deployment and optimization services, as well as training. The majority

of our consulting contracts are billed on a time and materials basis and revenue is recognized over time as the services are

performed. For contracts billed on a fixed price basis, revenue is recognized over time based on the proportion performed.

Contracts with Multiple Performance Obligations

Some of our contracts with customers contain multiple performance obligations. For these contracts, we account for

individual performance obligations separately if they are distinct. The transaction price is allocated to the separate

performance obligations on a relative standalone selling price basis. We determine the standalone selling prices based on

our overall pricing objectives, taking into consideration market conditions and other factors, including the value of our

contracts, the cloud applications sold, customer demographics, geographic locations, and the number and types of users

within our contracts.

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Trade and Other Receivables

Trade and other receivables are primarily comprised of trade receivables that are recorded at the invoice amount, net of an

allowance for doubtful accounts, which is not material. Other receivables represent unbilled receivables related to subscription and

professional services contracts.

Deferred Commissions

Sales commissions earned by our sales force are considered incremental and recoverable costs of obtaining a contract

with a customer. Sales commissions for initial contracts are deferred and then amortized on a straight-line basis over a

period of benefit that we have determined to be five years. We determined the period of benefit by taking into

consideration our customer contracts, our technology and other factors. Sales commissions for renewal contracts are

deferred and then amortized on a straight-line basis over the related contractual renewal period. Amortization expense is

included in Sales and marketing expenses in the accompanying condensed consolidated statements of operations.

Unearned Revenue and Performance Obligations

$398 million and $282 million of subscription services revenue was recognized during the three months ended July 31,

2017 and 2016, respectively, that was included in the unearned revenue balances at the beginning of the respective

periods. $759 million and $533 million of subscription services revenue was recognized during the six months ended July

31, 2017 and 2016, respectively, that was included in the unearned revenue balances at the beginning of the respective

periods. Professional services revenue recognized in the same periods from unearned revenue balances at the beginning

of the respective periods was not material.

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Transaction Price Allocated to the Remaining Performance Obligations

As of July 31, 2017, approximately $4.4 billion of revenue is expected to be recognized from remaining performance

obligations for subscription contracts. We expect to recognize revenue on approximately two thirds of these remaining

performance obligations over the next 24 months, with the balance recognized thereafter. Revenue from remaining

performance obligations for professional services contracts as of July 31, 2017 was not material.

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Disaggregation of Revenue

We sell our subscription contracts and related services in two primary geographical markets: to customers located in the

United States, and to customers located outside of the United States. Revenue by geography is generally based on the

address of the customer as specified in our master subscription agreement. The following table sets forth revenue by

geographic area (in thousands):

No single country other than the United States had revenues greater than 10% of total revenues for the three and six

months ended July 31, 2017 and 2016. No customer individually accounted for more than 10% of our trade and other

receivables, net as of July 31, 2017 or January 31, 2017.

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[Emphasis added]



……

We elected to early adopt the standard effective July 1, 2017, using the full retrospective method, which required us to

restate each prior reporting period presented. We implemented internal controls and key system functionality to enable the

preparation of financial information on adoption.

The most significant impact of the standard relates to our accounting for software license revenue. Specifically, for

Windows 10, we recognize revenue predominantly at the time of billing and delivery rather than ratably over the life of the

related device. For certain multi-year commercial software subscriptions that include both distinct software licenses and

SA, we recognize license revenue at the time of contract execution rather than over the subscription period. Due to the

complexity of certain of our commercial license subscription contracts, the actual revenue recognition treatment required

under the standard depends on contract-specific terms and in some instances may vary from recognition at the time of

billing. Revenue recognition related to our hardware, cloud offerings (such as Office 365), LinkedIn, and professional

services remains substantially unchanged.

Adoption of the standard using the full retrospective method required us to restate certain previously reported results,

including the recognition of additional revenue and an increase in the provision for income taxes, primarily due to the net

change in Windows 10 revenue recognition. In addition, adoption of the standard resulted in an increase in accounts

receivable and other current and long-term assets, driven by unbilled receivables from upfront recognition of revenue for

certain multi-year commercial software subscriptions that include both distinct software licenses and Software

Assurance; a reduction of unearned revenue, driven by the upfront recognition of license revenue from Windows 10 and

certain multi-year commercial software subscriptions; and an increase in deferred income taxes, driven by the upfront

recognition of revenue. Refer to Impacts to Previously Reported Results below for the impact of adoption of the standard

on our consolidated financial statements.

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Impacts to Previously Reported Results

Adoption of the standards related to revenue recognition and leases impacted our previously reported results as follows:

Adoption of the standards related to revenue recognition and leases had no impact to cash from or used in operating,

financing, or investing on our consolidated cash flows statements.

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Revenue Recognition

Revenue is recognized upon transfer of control of promised products or services to customers in an amount that reflects the

consideration we expect to receive in exchange for those products or services. We enter into contracts that can include various

combinations of products and services, which are generally capable of being distinct and accounted for as separate performance

obligations. Revenue is recognized net of allowances for returns and any taxes collected from customers, which are

subsequently remitted to governmental authorities.

Nature of Products and Services

Licenses for on-premises software provide the customer with a right to use the software as it exists when made

available to the customer. Customers may purchase perpetual licenses or subscribe to licenses, which provide

customers with the same functionality and differ mainly in the duration over which the customer benefits from the

software. Revenue from distinct on-premises licenses is recognized upfront at the point in time when the software is

made available to the customer. In cases where we allocate revenue to software updates, primarily because the

updates are provided at no additional charge, revenue is recognized as the updates are provided, which is generally

ratably over the estimated life of the related device or license.

Certain volume licensing programs, including Enterprise Agreements, include on-premises licenses combined with Software

Assurance (“SA”). SA conveys rights to new software and upgrades released over the contract period and provides support,

tools, and training to help customers deploy and use products more efficiently. On-premises licenses are considered distinct

performance obligations when sold with SA. Revenue allocated to SA is generally recognized ratably over the contract

period as customers simultaneously consume and receive benefits, given that SA comprises distinct performance

obligations that are satisfied over time……

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Cloud services, which allow customers to use hosted software over the contract period without taking possession of the software,

are provided on either a subscription or consumption basis. Revenue related to cloud services provided on a subscription

basis is recognized ratably over the contract period. Revenue related to cloud services provided on a consumption

basis, such as the amount of storage used in a period, is recognized based on the customer utilization of such

resources. When cloud services require a significant level of integration and interdependency with software and the

individual components are not considered distinct, all revenue is recognized over the period in which the cloud services

are provided.

Revenue from search advertising is recognized when the advertisement appears in the search results or when the action

necessary to earn the revenue has been completed. Revenue from consulting services is recognized as services are

provided.

Our hardware is generally highly dependent on, and interrelated with, the underlying operating system and cannot

function without the operating system. In these cases, the hardware and software license are accounted for as a single

performance obligation and revenue is recognized at the point in time when ownership is transferred to resellers or

directly to end customers through retail stores and online marketplaces.

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Significant Judgements

Our contracts with customers often include promises to transfer multiple products and services to a customer.

Determining whether products and services are considered distinct performance obligations that should be accounted

for separately versus together may require significant judgment. Certain cloud services, such as Office 365, depend on

a significant level of integration and interdependency between the desktop applications and cloud services. Judgment

is required to determine whether the software license is considered distinct and accounted for separately, or not

distinct and accounted for together with the cloud service and recognized over time.

Judgment is required to determine the SSP for each distinct performance obligation. We use a single amount to

estimate SSP for items that are not sold separately, including on-premises licenses sold with SA or software updates

provided at no additional charge. We use a range of amounts to estimate SSP when we sell each of the products and

services separately and need to determine whether there is a discount that needs to be allocated based on the relative

SSP of the various products and services.

In instances where SSP is not directly observable, such as when we do not sell the product or service separately, we

determine the SSP using information that may include market conditions and other observable inputs. We typically

have more than one SSP for individual products and services due to the stratification of those products and services by

customers and circumstances. In these instances, we may use information such as the size of the customer and

geographic region in determining the SSP.

Due to the various benefits from and the nature of our SA program, judgment is required to assess the pattern of delivery,

including the exercise pattern of certain benefits across our portfolio of customers.

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Significant Judgements

Our products are generally sold with a right of return and we may provide other credits or incentives, which are

accounted for as variable consideration when estimating the amount of revenue to recognize. Returns and credits are

estimated at contract inception and updated at the end of each reporting period as additional information becomes

available and only to the extent that it is probable that a significant reversal of any incremental revenue will not occur.

Contract Balances

Timing of revenue recognition may differ from the timing of invoicing to customers. We record a receivable when

revenue is recognized prior to invoicing, or unearned revenue when revenue is recognized subsequent to invoicing.

For multi-year agreements, we generally invoice customers annually at the beginning of each annual coverage period.

We record a receivable related to revenue recognized for multi-year on-premises licenses as we have an unconditional

right to invoice and receive payment in the future related to those licenses.

The opening balance of current and long-term accounts receivable, net of allowance for doubtful accounts, was $22.3

billion as of July 1, 2016.

As of September 30, 2017 and June 30, 2017, long-term accounts receivable, net of allowance for doubtful accounts,

were $1.6 billion and $1.7 billion, respectively, and are included in other long-term assets on our consolidated balance

sheets.

The allowance for doubtful accounts reflects our best estimate of probable losses inherent in the accounts receivable balance.

We determine the allowance based on known troubled accounts, historical experience, and other currently available evidence.

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Activity in the allowance for doubtful accounts was as follows:

Unearned revenue is comprised mainly of unearned revenue related to volume licensing programs, which may include

SA and cloud services. Unearned revenue is generally invoiced annually at the beginning of each contract period for

multi-year agreements and recognized ratably over the coverage period. Unearned revenue also includes payments for:

consulting services to be performed in the future; Office 365 subscriptions; LinkedIn subscriptions; Xbox Live

subscriptions; Windows 10 post-delivery support; Dynamics business solutions; Skype prepaid credits and

subscriptions; and other offerings for which we have been paid in advance and earn the revenue when we transfer

control of the product or service.

Payment terms and conditions vary by contract type, although terms generally include a requirement of payment within

30 to 60 days. In instances where the timing of revenue recognition differs from the timing of invoicing, we have

determined our contracts generally do not include a significant financing component. The primary purpose of our

invoicing terms is to provide customers with simplified and predictable ways of purchasing our products and services,

not to receive financing from our customers, such as invoicing at the beginning of a subscription term with revenue

recognized ratably over the contract period, or to provide customers with financing, such as multi-year on-premises

licenses that are invoiced annually with revenue recognized upfront.

Back to summary



Assets Recognized from the Costs to Obtain a Contract with a Customer

We recognize an asset for the incremental costs of obtaining a contract with a customer if we expect the benefit of those

costs to be longer than one year. We have determined that certain sales incentive programs meet the requirements to be

capitalized. Total capitalized costs to obtain a contract were immaterial during the periods presented and are included in

other current and long-term assets on our consolidated balance sheets.

We apply a practical expedient to expense costs as incurred for costs to obtain a contract when the amortization period

would have been one year or less. These costs include our internal sales force compensation program and certain

partner sales incentive programs as we have determined annual compensation is commensurate with annual sales

activities.

Unearned Revenue

Unearned revenue by segment was as follows:

Back to summary



The opening balance of unearned revenue was $22.2 billion as of July 1, 2016.

Changes in unearned revenue were as follows:

Revenue allocated to remaining performance obligations represent contracted revenue that has not yet been recognized

(“contracted not recognized”), which includes unearned revenue and amounts that will be invoiced and recognized as

revenue in future periods. Contracted not recognized revenue was $59 billion as of September 30, 2017, of which we

expect to recognize approximately 60% of the revenue over the next 12 months and the remainder thereafter.

Back to summary

[Emphasis added]


69

Exhibit II – Common Impact Areas and Illustrative Pre-adoption Disclosures


70Exhibit II – AA All industries Back to summary

Control

Sell-through recognition model will not be applicable anymore in certain instances.

Variable Consideration

Contracts that are currently precluded from revenue recognition (e.g. penalties, acceptance provisions, etc.)

because of the existing requirement for amounts to be fixed or determinable will be accounted for as variable

consideration under Topic 606. Companies will estimate the variable consideration and might recognize some

revenue earlier provided such terms are sufficient to estimate the ultimate price expected to be realized.

Contingent Revenue Rule

Topic 605 restricts the allocation of revenue that is contingent on future deliverables to current deliverables;

however, Topic 606 removes this restriction.

Contract Acquisition Costs

Topic 606 requires the deferral and amortization of “incremental” costs incurred to obtain a contract (e.g. sales

commissions) where the associated contract duration is greater than one year. Under current U.S. GAAP, such

costs are often expensed as incurred.

Disclosure

Topic 606 requires substantially more robust disclosures compared to Topic 605.

Impact areas disclosed across multiple industries


71Exhibit II – A Technology

Industry-specific Impact Areas Disclosed:

i. The requirement to have vendor specific objective evidence (VSOE) for undelivered elements is eliminated. As such,

revenue for certain functional software license will be recognized at a point in time compared to the current practice of

recognizing the entire sales price ratably over time due to the lack of VSOE.

ii. The timing of recognition of certain term license early renewals will be deferred until the commencement of the renewal

term rather than recognized upon execution of the renewal agreement.

iii. Revenue and cost related to certain set up and implementation will be deferred and recognized over the estimated contract

period or useful life of the asset if those activities do not transfer a service or are not distinct in the context of the contracts.

Currently, when those activities have standalone value and the related fees are not contingent on the delivery of future

goods or services, they are often recognized as performed.

iv. Currently, sales-based or usage-based royalties are often recognized as revenues in the period in which such royalties are

reported by licensees, which is after the conclusion of the quarter in which the licensees’ sales or usages occurs. Under the

new guidance, companies will be required to estimate and recognize royalties in the period in which the associated sales or

usages occur.

Illustrative Disclosure Examples:

Company/Link Adoption Method Disclosure of Quantitative Impact

▪ ServiceNow ▪ Full ▪ High-level quantified for certain affected areas

▪ Electronic Arts ▪ Modified ▪ No quantified impact was disclosed

▪ IBM ▪ Modified ▪ No quantified impact was disclosed

▪ Cisco ▪ Modified ▪ No quantified impact was disclosed

Back to summary


72Exhibit II – A Technology (Cont’d)

…… This new standard is effective for our interim and annual periods beginning January 1, 2018…… We currently

anticipate adopting the standard using the full retrospective method to restate each prior reporting period presented.

We do not expect the Topic 606 standard to have a material impact on the timing of revenue recognition related to our

cloud-based subscription offerings. However, we expect this new standard to have a material impact on the timing of

revenue and expense recognition for our contracts related to on-premises offerings, in which we grant customers the

right to deploy our subscription service on the customer’s own servers, without significant penalty. Under this new

standard, the requirement to have vendor specific objective evidence (VSOE) for undelivered elements is eliminated. As

such, we may be required to recognize as revenue a portion of the sales price upon delivery of the software, compared to

the current practice of recognizing the entire sales price ratably over an estimated subscription period due to the lack of

VSOE. To the extent the amounts recognized as revenue have not been billed, the accrued revenue will be recorded as

unbilled receivables on our condensed consolidated balance sheets. We currently believe that our total revenues

reported for the year ended December 31, 2016 would have increased by approximately $10 to $15 million on a pro forma

basis if the new standard had been applied for the entire 2016 fiscal year starting on January 1, 2016.

Back to industry main page



In addition, we expect the Topic 606 standard to change the way we account for commissions paid on both our on-

premises offerings and our cloud-based subscription offerings. Our current practice is to defer only direct and

incremental commission costs to obtain a contract and amortize those costs over the contract term for both our on-

premises offerings and our cloud-based subscription offerings. Under this new standard, we will defer all incremental

commission costs to obtain customer contracts, including indirect costs that are not tied to a specific contract, for both

our on-premises offerings and our cloud-based subscription offerings. Commissions allocated to the software element of

our on-premises offerings, which are delivered up front, will be expensed immediately under this new standard, while

commissions allocated to the support element of our on-premises offerings as well as commissions paid on our cloud-

based subscription offerings, which are delivered over time, will be amortized over an expected period of benefit, which

we have determined to be approximately five years. As a result, we currently expect the deferred commissions asset to

increase and the related amortization expense in each reporting period to decrease under this new standard. The

aggregate impact resulting from changes in the way we account for commission expense for both our cloud-based

subscription offerings and our on-premises offerings would have reduced our sales and marketing expenses by

approximately $20 to $25 million on a pro forma basis for the year ended December 31, 2016 if the new standard had been

applied for the entire 2016 fiscal year starting on January 1, 2016.

We are continuing to evaluate the impact of the adoption of this standard on our condensed consolidated financial

statements, including the increased disclosure requirements on our footnotes, and our preliminary assessments are

subject to change.


[Emphasis added]



…… We anticipate adopting the New Revenue Standard on April 1, 2018 using the modified retrospective method….

The New Revenue Standard will have a significant impact on our Condensed Consolidated Financial Statements and

related disclosures as it relates to the accounting for substantially all of our transactions with multiple elements or

“bundled” arrangements. For example, for sales of online-enabled games, as currently reported we do not have vendor-specific

objective evidence of fair value (“VSOE”) for unspecified future updates, and thus, revenue from the entire sales price is recognized

ratably over the estimated offering period. However, under the New Revenue Standard, the VSOE requirement for

undelivered elements is eliminated, allowing us to essentially “break-apart” our online-enabled games and account for

the various promised goods or services identified as separate performance obligations.

For example, for the sale of an online-enabled game, we usually have multiple distinct performance obligations such as

software, future update rights, and an online service. The software performance obligation represents the initial game

delivered digitally or via physical disc. The future update rights performance obligation may include software patches or

updates, maintenance, and/or additional free content to be delivered in the future. And lastly, the online service

performance obligation consists of providing the customer with a service of online activities (e.g., online playability).

Under current software revenue recognition rules, we recognize as revenue the entire sales price over the estimated

offering period. However, under the New Revenue Standard, we will recognize a portion of the sales price as revenue

upon delivery of the software performance obligation with the future update rights and online services portions

recognized ratably over the estimated offering period. We currently estimate that a significant portion of the sales price

will be allocated to the software performance obligation and recognized upon delivery, and the remaining will be

allocated to the future update rights and the online service performance obligations and recognized ratably over the

estimated offering period. As a result, we expect a significant portion of our annual revenue, and thereby annual profit,

will shift from the first and fourth fiscal quarters to the second and third fiscal quarters which is historically when a

significant portion of our annual bookings and software deliveries have been made.




In addition, both portions of sales price allocated to future update rights and online services will be classified as service

revenue under the New Revenue Standard (currently, only future update rights are generally presented as product

revenue). Therefore, upon adoption, an increased portion of our sales from online-enabled games will be presented as

service revenue than is currently reported today. Also, upon adoption of the New Revenue Standard, we will present our

sales returns and price protection reserves as liabilities (currently, sales returns and price protection reserves are

classified as contra-assets within receivables on our Condensed Consolidated Balance Sheets).


[Emphasis added]



...... The company will adopt the guidance on January 1, 2018 and apply the cumulative catch-up transition method.

Given the scope of work required to implement the recognition and disclosure requirements under the new standard, the company

began its assessment process in 2014 and has since made significant progress, including identification of changes to policy,

processes, systems and controls. This also includes the assessment of data availability and presentation necessary to meet the

additional disclosure requirements of the guidance in the Notes to the Consolidated Financial Statements.

The company expects revenue recognition for its broad portfolio of hardware, software and services offerings to remain largely

unchanged. However, the guidance is expected to change the timing of revenue recognition in certain areas, including

accounting for certain software licenses. These impacts are not expected to be material. The company expects to

continue to recognize revenue for term license (recurring license charge) software arrangements on a monthly basis over

the period that the client is entitled to use the license due to the contractual terms in these arrangements.

Since the company currently expenses sales commissions as incurred, the requirement in the new standard to capitalize

certain in-scope sales commissions is being evaluated to determine its potential impact in the consolidated financial

statements in the year of adoption. There will be no impact to cash flows.

The company continues to assess all potential impacts of the guidance and given normal ongoing business dynamics, preliminary

conclusions are subject to change. [Emphasis added]




...... Cisco will adopt the new standard using the modified retrospective method at the beginning of its first quarter of

fiscal 2019.

Cisco is on schedule in establishing new accounting policies, implementing systems and processes (including more extensive use

of estimates), and internal controls necessary to support the requirements of the new standard. Cisco has completed its preliminary

assessment of the financial statement impact of the new standard, as discussed below, and will continue to update that

assessment as more information becomes available.

The new standard will primarily impact Cisco’s revenue recognition for software arrangements and sales to two-tier

distributors. In both areas, the new standard will accelerate the recognition of revenue. The table below details both the

current and expected revenue recognition timing in these areas:




Cisco expects that the new standard will not have a material impact on total revenue in the year of adoption based on two

factors: i) revenue will be accelerated consistent with the changes in timing as indicated in the preceding table, largely

offset by ii) the reduction of revenue from software arrangements where revenue was previously deferred in prior periods

and recognized ratably over time as required under the current standard. This preliminary assessment is based on the

types and number of revenue arrangements currently in place. The exact impact of the new standard will be dependent

on facts and circumstances at adoption and could vary from quarter to quarter.

In addition to the above revenue recognition timing impacts, the new standard will require incremental contract

acquisition costs (such as sales commissions) for customer contracts to be capitalized and amortized over the contract

period. Currently, these costs are expensed as incurred.

Cisco will be required to record cumulative effect adjustments to retained earnings upon adopting the new standard at the

beginning of fiscal 2019. The most significant of these adjustments will be to reduce product deferred revenue and increase

retained earnings at the date of adoption to reflect revenue that would have been already recognized under the new standard

related to existing arrangements. There will also be an adjustment to increase accounts receivable and reduce inventories related

to the changes in revenue recognition on sales to two-tier distributors. Lastly, an adjustment will be recorded to establish an asset

and increase retained earnings related to the requirement to capitalize incremental contract acquisition costs for customer

contracts.

[Emphasis added]



79Exhibit II – B Industrial products, chemicals, and manufacturing Industry-specific Impact Areas Disclosed:

i. For certain contracts that are recognized based on percentage-of-completion units-of-delivery or attainment of milestones,

the adoption might result in change of revenue timing depending on when the control is transferred to customers.

ii. Guaranteed reimbursements of certain pre-production engineering, development and tooling costs related to products

manufactured for customers under long-term supply agreements are currently recorded as cost offsets by some

companies; whereas under the new standard such guaranteed recoveries may be recognized as revenues, as the

reimbursements specified in the customer contracts may represent consideration from contracts with customers under the

new standard. There continues to be on-going dialogue between industry groups and standard setters regarding the

treatment of these reimbursements under the new standard.

iii. Timing of revenue recognition for large manufacturing items might be earlier than current practice as the transfer of control

generally occurs earlier than that of risk of loss to customers.


Company/Link Adoption Method Disclosure of Quantitative Impact

▪ GE ▪ Full ▪ Quantified impact analysis on retained earning adjustment and EPS

▪ Lockheed Martin ▪ Full ▪ Quantified impact was disclosed in MD&A

▪ Honeywell ▪ Modified ▪ No quantified impact was disclosed

Back to summary


80

TRANSITION METHOD FOR APPLYING THE NEW STANDARD

Companies can use either a full retrospective or modified retrospective method to adopt the standard. Under the full

retrospective method, all periods presented will be updated upon adoption to conform to the new standard and a cumulative

adjustment for effects on periods prior to 2016 will be recorded to retained earnings as of January 1, 2016. Under the

modified retrospective approach, prior periods are not updated to be presented on an accounting basis that is consistent with

2018. Rather, a cumulative adjustment for effects of applying the new standard to periods prior to 2018 is recorded to

retained earnings as of January 1, 2018. Because only 2018 revenues reflect application of the new standard, incremental

disclosures are required to present the 2018 revenues under the prior standard.

As noted above, we have elected to apply the full retrospective approach. We chose that approach because we

believe that it is the most helpful to our investors. First and foremost, when we adopt the standard in 2018 we will

provide investors with a consistent view of historical trends, as 2016 and 2017 will be on a basis consistent with 2018.

CHANGE IN TIMING AND PRESENTATION, NO IMPACT TO CASH OR ECONOMICS

The new standard requires companies to identify contractual performance obligations and determine whether revenue should

be recognized at a point in time or over time based on when control of goods and services transfer to a customer. As a

result, we expect significant changes in the presentation of our financial statements, including: (1) timing of

revenue recognition, and (2) changes in classification between revenue and costs. The new standard will have no

cash impact and, as such, does not affect the economics of our underlying customer contracts. The effect of applying the

new guidance to our existing book of contracts will result in lower reported earnings in 2018 (and comparative

periods previously reported) and in the early years after adoption. However, we expect to experience an increase in

reported earnings, on that existing book of contracts, as they mature. The new standard will provide for a better

alignment of cash and earnings for the affected long-term customer contracts and we expect that it will enhance

comparability across industry peers.

Exhibit II – B Industrial products, chemicals, and manufacturing (Cont’d)



81

SPECIFIC EFFECT ON GE BUSINESSES

Power and Aviation Service Agreements - For our long-term product service agreements, primarily in our Power and

Aviation businesses, we expect to continue to recognize revenue based on costs incurred plus an estimated margin rate

(over time model). However, the new standard provides prescriptive guidance tied to several factors for determining what

constitutes the proper scope of a customer contract for accounting purposes. These factors include optional purchases,

contract modifications, and termination clauses. For example, under the new standard contract modifications will be

accounted for prospectively by recognizing the financial effect of the modification over the remaining life of the

contract. Under existing accounting guidance revisions to estimated margin rates resulting from modifications were

reflected as cumulative effect adjustments to earnings in the current period.

Aviation Commercial Engines - Consistent with industry peers, the financial presentation of our Aviation Commercial

engines business will be significantly affected as they will be accounted for as of a point in time, which is a change

from our current long-term contract accounting process. Our current process applies contract-specific estimated

margin rates, which include the effect of estimated cost improvements, to costs incurred. This change is required

because our commercial engine contracts do not transfer control to the customer during the manufacturing

process. Each install and spare engine will be accounted for as a separate performance obligation, reflecting the

actual price and manufacturing costs of such engines. We expect that the most significant effect of this change will be

reflected when we have new engine launches, where the cost of earlier production units is higher than the cost of later

production units because of cost improvements.

All Other Large Equipment - For the remainder of our equipment businesses, the new revenue standard requires

emphasis on transfer of control rather than risks and rewards, which may accelerate timing of revenue recognition

versus our current practices. For example, in our Renewable Energy business we wait for risk of loss to be assumed by

the customer before recognizing revenue, which generally occurs later than when control is transferred.




82

CURRENT RANGE OF FINANCIAL STATEMENT EFFECT

We will adopt the new standard as of January 1, 2018. When we report our 2018 results, the comparative results for 2017

and 2016 will be updated to reflect the application of the requirements of the new standard to these periods. Based on our

assessment and best estimates to date, we expect a non-cash charge to our January 1, 2016 retained earnings

balance of approximately $4.3 billion. We estimate that the charge will comprise approximately $1.0 billion related to

commercial aircraft engines and $3.3 billion related primarily to our services businesses (predominately in Power

and Aviation). Beyond those effects, we expect application of the new guidance will result in increases and

decreases in revenue within our segments, which will largely offset overall and will be immaterial at a total company

level. We estimate that our 2016 restated earnings per share will be lower by approximately $0.13, driven primarily

by the required changes in accounting for long-term product service arrangements as described above. The

expected effect to 2016 earnings per share reflects an increase from the previously reported estimate of

approximately $0.10 due to further refinements in the application of our technical interpretations and our detailed

assessments at a contract level, which is a complex process for our long-term contracts. In addition, the impact on

2017 will also be a decrease to earnings; however, we are unable to complete that calculation until we finalize our

2017 results. Upon adoption in 2018, our books and records will only reflect the results as required under the new standard

limiting our ability to estimate the effect of the standard on our earnings. Given the inherent difficulty in this ongoing

estimation of the effect of the standard on any future periods, we do not plan to continue to assess the effect on 2018.

To summarize, we will adopt the new standard in 2018, at which time we will update prior periods to be presented on a

consistent basis. As discussed above, we anticipate a dilutive effect of the new standard in the year of adoption

consistent with the effect to the restated 2016 and 2017 results and the effect will be less dilutive for years after

initial adoption. However, this expectation is based on many variables, including underlying business performance,

which are subject to change, making the effect of the standard on future periods difficult to estimate. Importantly,

application of the new guidance has no effect on the cash we expect to receive nor the economics of these contracts. Rather,

it will simply more closely align revenue with cash, which we believe will be helpful to our investors. [Emphasis added]




……We will adopt the requirements of the new standard on the effective date of January 1, 2018 using the full

retrospective transition method……

We commenced our evaluation of the impact of ASC 606 in late 2014, by evaluating its impact on selected contracts at each of

our business segments. With this baseline understanding, we developed a project plan to evaluate thousands of contracts across

our business segments, develop processes and tools to dual report financial results under both current GAAP and ASC 606 and

assess the internal control structure in order to adopt ASC 606 on January 1, 2018. We have periodically briefed our Audit

Committee on our progress made towards adoption.

We currently recognize the majority of our revenue using the percentage-of-completion method of accounting, whereby revenue is

recognized as we progress on the contract. For contracts with a significant amount of development and/or requiring the delivery of

a minimal number of units, revenue and profit are recognized using the percentage-of-completion cost-to-cost method to measure

progress. For example, we use this method at our Aeronautics business segment for the F-35 program; at our MFC business

segment for the THAAD program; at our RMS business segment for the Littoral Combat Ship and Aegis Combat System

programs; and at our Space Systems business segment for government satellite programs. For contracts that require us to

produce a substantial number of similar items without a significant level of development, we currently record revenue and profit

using the percentage-of-completion units-of-delivery method as the basis for measuring progress on the contract. For example,

we use this method in Aeronautics for the C-130J and C-5 programs; in MFC for tactical missile programs (e.g., Hellfire, JASSM),

PAC-3 programs and fire control programs (e.g., LANTIRN®, Sniper®); in RMS for Black Hawk and Seahawk helicopter

programs; and in Space Systems for commercial satellite programs. For contracts to provide services to the U.S. Government,

revenue is generally recorded using the percentage-of-completion cost-to-cost method.

83Exhibit II – B Industrial products, chemicals, and manufacturing (Cont’d)



Under ASC 606, revenue will be recognized as the customer obtains control of the goods and services promised in the

contract (i.e., performance obligations). Given the nature of our products and terms and conditions in our contracts, in

particular those with the U.S. Government (including foreign military sales (FMS) contracts), the customer obtains control

as we perform work under the contract. Therefore, we expect to recognize revenue over time for substantially all of our

contracts using a method similar to our current percentage-of-completion cost-to-cost method. Accordingly, adoption of

ASC 606 will primarily impact our contracts where revenue is currently recognized using the percentage-of-completion

units-of-delivery method. As a result, we anticipate recognizing revenue for these contracts earlier in the performance

period as we incur costs, as opposed to when units are delivered. We may also have more performance obligations in our

contracts under ASC 606, which may impact the timing of recording sales and operating profit, including those where

sales recognition is deferred pending the incurrence of costs. Backlog will also be impacted upon our adoption to reflect

these changes and the requirements of ASC 606.

During the third quarter of 2017, we completed our preliminary assessment of the cumulative effect of adopting ASC 606 on our

December 31, 2015 balance sheet using the full retrospective transition method. The adoption resulted in a decrease in

inventories, an increase in billed receivables, contract assets (i.e., unbilled receivables) and contract liabilities

(i.e., customer advances and amounts in excess of costs incurred) to primarily reflect the impact of converting contracts

currently applying the units-of-delivery method to the cost-to-cost method for recognizing revenue and profits. We expect

the net impact of these reclassifications to increase both our current assets and current liabilities by approximately 2%.

In addition, we completed our preliminary assessment of adopting ASC 606 on our fiscal year 2016 operating results

during the third quarter of 2017. We expect the adoption of ASC 606 to increase our 2016 net sales by approximately less

than 1% and decrease our operating profit and net earnings from continuing operations each by approximately less

than 2%.

The impact of adopting ASC 606 on our 2016 operating results may not be indicative of the adoption impacts in future

periods or of our operating performance. We will continue our evaluation of ASC 606, including any new interpretations,

through the date of adoption.




Discussion in MD&A

Effective January 1, 2018, we will adopt Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with

Customers, as amended (commonly referred to as ASC 606), which will change the way we recognize revenue for certain

customer contracts. During the third quarter of 2017, we completed a preliminary assessment of the impacts of adopting ASC 606

on our 2017 financial outlook. The following table presents our updated 2017 outlook under the current revenue

recognition accounting standard (ASC 605) and our preliminary estimate under ASC 606. We are providing this information

to assist in understanding our 2018 trend information in the following paragraphs. Additional information regarding the impacts of

adopting ASC 606 can be found in "Note 10 - Other" included in our Notes to Consolidated Financial Statements (under the

caption "Recent Accounting Pronouncements").




We expect our 2018 net sales to increase by approximately 2% as compared to 2017 net sales adjusted for the adoption

of ASC 606 presented in the preceding table. Total business segment operating margin in 2018 is expected to be in the

10.3% to 10.5% range and cash from operations is expected to be greater than or equal to $5.0 billion. The preliminary

outlook for 2018 assumes the U.S. Government continues to support and fund our key programs beyond the continuing

resolution for government fiscal year (GFY) 2018. Changes in circumstances may require us to revise our assumptions,

which could materially change our current estimate of 2018 net sales, operating margin and cash flows.



[Emphasis added]



…… We will adopt the requirements of the new standard effective January 1, 2018 and expect to use the modified

retrospective transition method with the cumulative effect to the opening balance of retained earnings recognized as

of the date of initial adoption. We believe we are following an appropriate timeline to allow for proper recognition,

presentation and disclosure upon adoption, including the related impacts to internal controls.

The Company’s evaluation of the new standard is substantially complete and the Company has prepared an initial assessment

of the impacts of adoption on its Consolidated Financial Statements and disclosures. The FASB has issued, and may issue in

the future, interpretive guidance which may cause our evaluation to change. We will continue to evaluate the adoption impact of

the new standard, including as it relates to new contracts that will be recognized following adoption. Based on the evaluation

of our current contracts and revenue streams, recognition will be mostly consistent under both the current and new

standard. However, we expect the guidance in certain areas, particularly in our Aerospace segment, to impact our

current revenue recognition policies.

The current accounting policy for costs incurred for nonrecurring engineering and development activities of our

Aerospace products under agreements with commercial customers is generally to record the expense as incurred.

Any customer funding received for such efforts is recognized when earned as a reduction of cost of sales. Following

adoption of the new standard, the customer funding will generally be classified as revenue and not as a reduction of

cost of sales. Such revenue will be deferred and subsequently recognized as products are delivered to the customers.

Additionally, under the new guidance, expenses incurred, up to the customer agreed funded amount, will be deferred

as an asset and subsequently recognized as cost of sales also when products are delivered to the customer. Hence,

the new guidance will result in an increase in deferred costs (asset) and deferred revenue (liability) on our

Consolidated Balance Sheet, however, we expect this to result in no net impact to income before taxes.



88

[Emphasis added]


In In addition, we expect revenues for our mechanical service programs at our Aerospace business to be impacted.

Our current policy is to recognize revenue over time as costs are incurred (input method). Following adoption, we

will continue to recognize revenue over time, but recognition will reflect a series of distinct services using the output

method. This change will result in certain unbilled receivables or deferred revenue being eliminated through retained

earnings, but we do not expect a material impact.

We do not currently expect the new standard to have a material impact on our consolidated financial position or

results of operations. We expect the new standard will have no cash impact and, as such, does not affect the

economics of our underlying customer contracts. The disclosures in our notes to Consolidated Financial Statements

related to revenue recognition will be significantly expanded under the new standard, specifically around the

quantitative and qualitative information about performance obligations, changes in contract assets and liabilities,

and disaggregation of revenue.



89Exhibit II – C Transportation and utilities


i. The incremental cost approach used by airline companies for miles earned through travel will be eliminated.

ii. Certain airline ancillary fees directly related to passenger revenue tickets, such as airline change fees and baggage fees,

are likely no longer considered distinct performance obligations separate from the passenger travel component. As a result,

such fees which were previously recognized when received will likely be recognized when transportation is provided.

iii. Many utility companies disclosed that they do not expect a significant change in revenue practices. Additionally, certain

industry-specific implementation issues have been substantially resolved through AICPA Task Force, including the

collectability of utility tariff sale contracts and the accounting for bundled sales contracts. Specifically,

• Some utility companies expect that tariff sale contracts, including those with lower credit quality customers, are

generally deemed to be probable of collection under the guidance and, thus, the timing of revenue recognition will

continue to be based on the electricity or natural gas supplied in the period, consistent with current practice.

Revenues recognized from bundled sales contracts are generally expected to be recognized based on the invoice

price, consistent with current practice; and

• Contributions in aid of construction are expected to be outside of the scope of the standard and, therefore, will

continue to be accounted for as a reduction to Property, Plant, and Equipment.


Company Adoption Method Disclosure of Quantitative Impact

▪ GOL ▪ Full ▪ No quantified impact was disclosed

▪ American Airlines ▪ Full ▪ High-level quantified impact was disclosed in MD&A

▪ Exelon ▪ Full ▪ No quantified impact was disclosed

Back to summary


90

…. The Company expects to adopt the new standard on the date it becomes effective using the full retrospective method. In

2016, the Company carried out a preliminary assessment of IFRS 15, which is subject to changes due to more detailed analyses that

are still in progress. Among the main challenges for the adoption of IFRS 15, the Company believes that the recognition of

the following revenues may change compared with the current format:

a) Passenger revenue arising from codeshare agreements: corresponds to agreements where two or more airlines get into

an agreement to provide air transportation services. In situations when the Company will work as the principal, revenue will

be recognized based on the gross value of the transaction (price of the ticket to the final customer), rather than on the

portion that corresponds only to the service provided by the Company.

b) Ancillary revenue: comprises all revenue related to air transportation services, such as excess baggage, cancelation fees,

refunds, among others. These revenues must be assessed and classified as “distinct” or “related to the main service”, and are

recognized only when the air transportation service incurred. In this regard, the Company does not expect significant changes,

since these revenues are already recognized based on this criteria, at the moment of recognition of passenger

transportation revenue. In this regard, the Company is performing its assessment and does not expect significant changes.

c) Breakage revenue: comprises the expectation of mileage and tickets that are not likely to be used by the customer. To recognize

these revenues, the Company uses analysis tools and statistical data that allow the estimate to be calculated with a reasonable level

of certainty. Given the standard’s specific requirements regarding this, the Company does not believe that the

implementation of IFRS 15 will cause material impacts.

Additionally, the Company will continue assessing the impacts from the adoption of the new standard and will disclose additional

information as the analyses are concluded.

Exhibit II – C Transportation and utilities (Cont’d)


[Emphasis added]


91

…… We will adopt the new revenue standard effective January 1, 2018. Entities have the choice to apply the new revenue

standard either retrospectively to each reporting period presented or by recognizing the cumulative effect of applying the new

revenue standard at the date of initial application and not adjusting comparative information. We currently expect to adopt the

new revenue standard using the full retrospective method.

We are in the process of finalizing how the application of the new revenue standard will impact our condensed consolidated

financial statements. We currently expect that the new revenue standard will materially impact our liability for

outstanding mileage credits earned by AAdvantage loyalty program members. We currently use the incremental cost

method to account for this portion of our loyalty program liability, which values these mileage credits based on the

estimated incremental cost of carrying one additional passenger. The new revenue standard will require us to change

our policy and apply a relative selling price approach whereby a portion of each passenger ticket sale attributable to

mileage credits earned will be deferred and recognized in passenger revenue upon future mileage redemption. The

carrying value of the earned mileage credits recognized in loyalty program liability is expected to be materially greater

under the relative selling price approach than the value attributed to these mileage credits under the incremental cost

method. The new revenue standard will also require us to reclassify certain ancillary fees to passenger revenue, which

are currently included within other operating revenue.

Discussion in MD&A

We currently estimate that upon adoption of the new revenue standard as of January 1, 2018, our liability for

outstanding mileage credits will increase by approximately $5.5 billion, offset in part by a $2.0 billion increase in our

deferred tax asset, resulting in a net $3.5 billion charge to retained earnings. Additionally, after applying the new

revenue standard, our 2017 passenger revenue and pre-tax income is currently estimated to increase by approximately

$300 million. Finally, approximately $2.5 billion annually of ancillary revenues presently included within other revenue

will be reclassified to passenger revenue. This reclassification will have no impact on total operating revenues. The

foregoing estimates are subject to change. [Emphasis added]




92

The Registrants have assessed the revenue recognition standard and are executing a detailed implementation plan in preparation

for adoption on January 1, 2018. The Registrants have also actively participated in the AICPA Power and Utilities Industry Task

Force (Industry Task Force) process to identify implementation issues and support the development of related implementation

guidance. In coordination with the Industry Task Force, the Registrants have reached conclusions on the following key accounting

issues:

• The Utility Registrants’ tariff sale contracts, including those with lower credit quality customers, are generally

deemed to be probable of collection under the guidance and, thus, the timing of revenue recognition will

continue to be concurrent with the delivery of electricity or natural gas, consistent with current practice;

• Consistent with current industry practice, revenues recognized from sales of bundled energy commodities (i.e.,

contracts involving the delivery of multiple energy commodities such as electricity, capacity, ancillary services,

etc.) are generally expected to be recognized upon delivery to the customer in an amount based on the invoice

price given that it corresponds directly with the value of the commodities transferred to the customer; and

• Contributions in aid of construction are outside of the scope of the standard and, therefore, will continue to be

accounted for as a reduction to Property, Plant, and Equipment.

The Registrants have also completed the following key activities in their implementation plan:

• Evaluated existing contracts and revenue streams for potential changes in revenue recognition under the new

guidance. Based on these assessments, the Registrants have identified the following items that will be accounted

for differently under the new revenue guidance as compared to current guidance:

• Costs to acquire certain contracts (e.g., sales commissions associated with retail power contracts) will

be deferred and amortized ratably over the term of the contract rather than being expensed as incurred;

and

• Variable consideration within certain contracts (e.g., performance bonuses) will be estimated and

recognized as revenue over the term of the contract rather than being recognized when realized.




93

Notwithstanding these identified changes, Exelon does not expect the new guidance will have a material impact on

the amount and timing of revenue recognition;

• Currently expect to apply the new guidance using the full retrospective method; and

• Generation expects to disclose disaggregated revenue by operating segment and further differentiation by major

products (i.e., electric power and gas) and the Utility Registrants expect to disclose disaggregated revenue by major

customer class (i.e., residential and commercial & industrial) separately for electric and gas in the Combined Notes

to Consolidated Financial Statements. [Emphasis added]




94Exhibit II – D Life science


i. Overall, companies do not believe the adoption of ASC 606 will have a significant impact on revenue generated from

product sales.

ii. Companies start to disclose their preliminary conclusion as to whether the revenue practices related to collaboration

arrangements will change or not. The disclosures mainly include the distinct evaluation of the license and the potential

change in practices related to milestone payments.


Company Adoption

Method

Disclosure of Quantitative Impact

▪ Bristol Myers Squibb Co ▪ Modified ▪ Quantified impact on revenue was disclosed

▪ Incyte ▪ Modified ▪ No quantified impact was disclosed

▪ AbbVie ▪ Modified ▪ Quantified impact analysis on retained earnings

Back to summary


95

Amended guidance for revenue recognition will be adopted in the first quarter of 2018 using the modified retrospective

method with the cumulative effect of the change recognized in retained earnings. The new guidance referred to as ASC 606

requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or

services to customers and replaces most of the existing revenue recognition standards in U.S. GAAP. A five step model will be

utilized to achieve the core principle; (1) identify the customer contract, (2) identify the contract’s performance obligations, (3)

determine the transaction price, (4) allocate the transaction price to the performance obligations and (5) recognize revenue when

or as a performance obligation is satisfied.

The Company’s assessment of the new standard’s impact is substantially complete. The timing of recognizing revenue is not

expected to change for typical net product sales to customers, most existing alliance arrangements as well as royalties

and sale-based milestones from out-licensing arrangements. In addition, the timing of recognizing royalties, sales-based

milestones and other forms of contingent consideration resulting from the divestiture of businesses is not expected to

change.

However, transaction prices are no longer required to be fixed or determinable and certain variable consideration might

be recognized prior to the occurrence or resolution of the contingent event to the extent it is probable that a significant

reversal in the amount of estimated cumulative revenue will not occur. Certain estimated future royalties and termination

fees for licensing rights previously reacquired by alliance partners are expected to be recognized as contract assets

upon adoption of the new standard. Refer to the Sanofi and Erbitux* Japan arrangements in "Note 3. Alliances" of the

2016 Form 10-K. As a result of the new guidance and cumulative effect adjustment, revenue and other income is

expected to be lower in 2018 by approximately $225 million and $125 million, respectively, compared to what would have

been reported under the previous standard.

Exhibit II – D Life science (Cont’d)


[Emphasis added]


96

… We have substantially completed an initial impact assessment of the potential changes from adopting ASU 2014-09. The

impact assessment consisted of a review of a representative sample of contracts, discussions with key stakeholders, and a

cataloging of potential impacts on our financial statements, accounting policies, financial controls, and operations. We currently

do not anticipate a material impact on our revenue recognition practices for product and royalty revenues. We do

anticipate that the adoption of ASU 2014-09 will have primarily two impacts on our contract revenues generated by our

collaborative research and license agreements:

(i) Changes in the model for distinct licenses of functional intellectual property which may result in a timing difference of

revenue recognition. Whereas revenue from these arrangements was previously recognized over a period of time

pursuant to revenue recognition guidance that was in place for our arrangements at the time such arrangements

commenced, revenue from these arrangements may now be recognized at point in time under the new guidance.

(ii) Assessments of milestone payments, which are linked to events that are in our control, will result in variable

consideration that may be recognized at an earlier point in time under the new guidance, when it is probable that the

milestone will be achieved without a significant future reversal of cumulative revenue expected.

We have not yet completed our final review of the impact of this guidance including the new disclosure requirements, as we are

continuing to evaluate the impacts of adoption and the implementation approach to be used. We plan to adopt the new

standard effective January 1, 2018 and are considering adopting using the modified retrospective method. We continue to

monitor additional changes, modifications, clarifications or interpretations being undertaken by the FASB, which may impact our

current conclusions.



[Emphasis added]


97

…. AbbVie will adopt the standard effective the first quarter of 2018 and apply the amendments using the modified

retrospective method. The company has made substantial progress in its review of the new standard and will complete its

assessment by December 31, 2017. AbbVie does not expect significant changes to the amounts or timing of revenue

recognition for product sales, which is its primary revenue stream. However, the company expects that the adoption

of the new standard will require a cumulative-effect adjustment to retained earnings on January 1, 2018 of

approximately $130 million, net of tax, primarily related to certain deferred license revenues that were originally

expected to be recognized through early 2020.



[Emphasis added]


98Exhibit II – E Entertainment, media and communications Industry-specific Impact Areas Disclosed:

i. Under the current guidance, revenue for the renewed license term is recognized on the date the renewal is agreed to

contractually. Under the new guidance, such revenue will not be recognized until the later of the date the renewal term begins or

the licensed content becomes available.

ii. Under the current guidance, when a company licenses a completed library of content and agrees to refresh the library with new

content as it becomes available, and the licensee is not entitled to a refund if no further library titles are delivered, revenue is

recognized once access to the library is granted to the licensee. Under the new guidance, the company will need to estimate the

additional content it will deliver in the future and allocate a portion of the transaction price to that content.

iii. Certain intellectual property, such as brands, trade names and logos, is categorized in the new guidance as symbolic, which

results in over-time revenue recognition. Under the current guidance, when there are no remaining performance obligations,

revenue from such licenses of symbolic intellectual property is recognized at the inception of the license term.

iv. Due to the elimination of contingent revenue rule, it will no longer be permitted to recognize revenue net of discounts during the

promotional periods and not recognize any revenue during free service periods. Instead, revenue recognition will be accelerated

for these contracts as the impact of discounts or free service periods that are considered performance obligations will be

recognized uniformly over the total contractual period.

v. Certain upfront installation or set-up fee that is currently recognized upon completion of the associated services will be deferred

and recognized over a period of time as those services do not constitute distinct performance obligations.



▪ Dish Network ▪ Modified ▪ No quantified impact was disclosed

▪ Verizon ▪ Modified ▪ No quantified impact was disclosed

▪ T-Mobile ▪ Modified ▪ Quantified impact related to contract acquisition costs was disclosed

Back to summary


99

…… ASU 2014-09 allows for either a full retrospective or modified retrospective adoption, and we plan on using the modified

retrospective method. We are currently finalizing our accounting policies under ASU 2014-09. While we have not

determined the ultimate impact of the standard on our Condensed Consolidated Financial Statements and related

disclosures, we believe the most significant impact to us is that the standard will require that incremental costs to

obtain a customer, which represent a significant portion of our non-advertising subscriber acquisition costs, be

deferred and recognized over a period of time, whereas our current policy is to expense these costs as

incurred. Note that where the expected amortization period is less than a year, we plan to use the practical

expedient which permits expensing of these costs. From a revenue perspective, for substantially all of our

residential video customers under a contract, we have concluded that the contract term under ASC 2014-09 is one

month. Accordingly, while there will be changes in the way certain upfront fees and other items are recognized, we

do not believe at this time there will be a material change to our revenue recognition model for our residential video

customers. We are currently in the process of identifying and implementing changes to our systems, processes, and

internal controls to meet the requirements of the standard. The ultimate impact of adopting ASU 2014-09 for both revenue

recognition and costs to obtain and fulfill contracts will depend on the promotions and offers in place during the period leading

up to and after the adoption of ASU 2014-09.

Exhibit II – E Entertainment, media and communications (Cont’d)

[Emphasis added]



100

….. We are in the process of evaluating the impact of the standard update. The ultimate impact on revenue resulting from the

application of the new standard will be subject to assessments that are dependent on many variables, including, but not limited to,

the terms of our contractual arrangements and our mix of business. Upon adoption, we expect that the allocation of revenue

between equipment and service for our wireless fixed-term service plans will result in more revenue allocated to

equipment and recognized earlier as compared with current GAAP. We expect the timing of recognition of our sales

commission expenses will also be impacted, as a substantial portion of these costs, which are currently expensed, will be

capitalized and amortized as described above. In 2016, total sales commission expenses were approximately $4.2 billion.

In 2017, we expect total sales commission expenses to decline as our wireless customers continue to migrate from our

fixed-term service plans to device payment plans which have lower commission structures.

We have established a cross-functional coordinated implementation team to implement the standard update related to the

recognition of revenue from contracts with customers. We have identified and are in the process of implementing changes to our

systems, processes and internal controls to meet the standard update’s reporting and disclosure requirements.



[Emphasis added]


101

…… We are adopting the standard using the modified retrospective method with a cumulative catch up adjustment and

providing additional disclosures comparing results to previous GAAP.

We currently anticipate this standard will have a material impact on our consolidated financial statements. While we are

continuing to assess all potential impacts of the standard, we currently believe the most significant potential impacts

include the following items:

• Whether our EIP contracts contain a significant financing component, which is similar to our current practice of

imputing interest, and would similarly impact the amount of revenue recognized at the time of an EIP sale and

whether or not a portion of the revenue is recognized as interest and included in other revenues, rather than

equipment revenues. We currently expect to recognize the financing component in our EIP contracts, including

those financing components that are not considered to be significant to the contract. We believe that this application

will be consistent with our current practice of imputing interest.

• As we currently expense contract acquisition costs, we believe that the requirement to defer incremental contract

acquisition costs and recognize them over the term of the initial contract and anticipated renewal contracts to which

the costs relate will have a significant impact to our consolidated financial statements. We plan to utilize the practical

expedient permitting expensing of costs to obtain a contract when the expected amortization period is one year or

less which we expect will typically result in expensing commissions paid to acquire branded prepaid service

contracts. Currently, we believe that incremental contract acquisition costs of approximately $450 million to $550

million that were incurred during the nine months ended September 30, 2017, which consists primarily of

commissions paid to acquire branded postpaid service contracts, would require capitalization and amortization

under the new standard. We expect that deferred contract costs will have an average amortization period of

approximately 24 months, subject to being monitored and updated every period to reflect any significant change in

assumptions. In addition, the deferred contract cost asset will be assessed for impairment on a periodic basis.




102

• We expect that promotional bill credits offered to customers on equipment sales that are paid over time and are

contingent on the customer maintaining a service contract will result in extended service contracts, which impacts

the allocation and timing of revenue recognition between service revenue and equipment revenue.

• Overall, with the exception of the aforementioned impacts, we do not expect that the new standard will result in a

substantive change to the method of allocation of contract revenues between various services and equipment, nor to

the timing of when revenues are recognized for most of our service contracts.

We are still in the process of evaluating these impacts, and our initial assessment may change due to changes in the terms and

mix of the contractual arrangements we have with customers. New products or offerings, or changes to current offerings may

yield significantly different impacts than currently expected.

We are in the process of implementing significant new revenue accounting systems, processes and internal controls over

revenue recognition which will assist us in the application of the new standard.


[Emphasis added]



103Exhibit II – F Wholesale, retail, services and other


i. Revenue associated with the unredeemed portion of gift cards will be recognized over the expected redemption period

under the new standard rather than waiting until the likelihood of redemption becomes remote or waiting for the gift card to

expire.

ii. Franchise fees that are currently recognized when a new store opens or at the start of a new franchise term will be

recognized over the franchise term if the initial franchise services are not distinct from the continuing rights or services

offered during the term of the franchise agreement.

iii. Advertising fund contributions from franchisees and the related advertising expenditures are currently reported on a net

basis on balance sheets as deferred liability or receivable depending on the relative timing difference between advertising

fund contributions received and advertising expenditures spent for the period. Under the new guidance, advertising fund

contributions from franchisees and advertising fund expenditures will be reported on a gross basis if the entity acts as a

principal to such contributions and expenditures. As a result, the related advertising fund revenues and expenses may be

reported in different periods.



▪ Yum China Holdings ▪ Still assessing ▪ No quantified impact was disclosed

▪ Home Depot ▪ Modified ▪ No quantified impact was disclosed

▪ Best Buy ▪ Modified ▪ No quantified impact was disclosed

Back to summary


104

…… We are required to adopt the new standards in the first quarter of 2018 and are evaluating which transition method

we will utilize.

We do not believe these standards will impact our recognition of revenue from Company-owned restaurants or our

recognition of continuing fees from franchisees, which are based on a percentage of franchise sales. However, the initial

fees from franchisees, which are currently recognized as revenue when we have performed substantially all initial

services required by the franchise agreement, generally upon the opening of a store, will be recognized over the term of

the franchise agreement because the franchise rights will be accounted for as rights to access our symbolic intellectual

property. This will result in additional deferred revenue associated with the franchise right upon adoption of the new

standard. We recognized $2 million and $5 million of initial fees, including renewal fees, as revenue for the quarter and

year to date ended August 31, 2017, respectively. We are evaluating whether the standards will have an impact on

transactions currently not included in our revenues such as franchisee contributions to and subsequent expenditures

from advertising programs. We act as an agent in regard to these franchisee contributions and expenditures and as such

we do not currently include them in our statements of income or cash flows. We are evaluating whether the new

standards will impact the principal/agent determinations in these arrangements. If we determine we are the principal in

these arrangements we would include contributions to and expenditures from these advertising programs within our

Consolidated Statements of Income and Cash Flows. While any such change has the potential to materially impact our

gross amount of reported revenues and expenses, such impact would largely be offsetting and we would not expect

there to be a significant impact on our reported Net Income. In addition, we are continuing to evaluate the impact the

adoption of these standards will have on the recognition and presentation of other revenue transactions with

unconsolidated affiliates and franchisees. The new guidance also requires enhanced disclosures, including the

identification of performance obligations and significant judgments in measurement and recognition.

Exhibit II – F Wholesale, retail, services and other (Cont’d)



105

Similarly, we are currently evaluating whether the benefits we receive from incentive payments we may make to our

franchisees (e.g. equipment funding provided under the KFC U.S. Acceleration Agreement, see Note 5) are separate and

distinct from the benefits we receive from the franchise right. If they cannot be separated from the franchise right then

such incentive payments would be amortized as a reduction of revenue over the term of the franchise agreement.

Currently, we recognize any payments made to franchisees within our Consolidated Statements of Income when we are

obligated to make the payment.

We are also evaluating whether the standards will have an impact on transactions currently not included in our revenues

and expenses such as franchisee contributions to and subsequent expenditures from advertising cooperatives that we

are required to consolidate under current GAAP. We act as an agent in regard to these franchisee contributions and

expenditures and as such we do not currently include them in our Consolidated Statements of Income or Cash Flows.

See Note 2 of our 2016 Form 10-K for details. We are evaluating whether the new standards will impact the principal/agent

determinations in these arrangements. If we determine the aforementioned franchisee contributions represent separate

performance obligations from the overall franchise right and that we are the principal in these arrangements we would

include contributions to and expenditures from these advertising cooperatives within our Consolidated Statements of

Income and Cash Flows. While any such change has the potential to materially impact our gross amount of reported

revenues and expenses, such impact would largely be offsetting and we would not expect there to be a significant impact

on our reported Net Income. Additionally, the new guidance requires enhanced disclosures, including the identification of

performance obligations and significant judgments in measurement and recognition.



[Emphasis added]


106

……

The Company continues to evaluate the effect that ASU No. 2014-09 will have on its Consolidated Financial Statements and

related disclosures and controls. Based on its preliminary assessment, the Company has determined that the adoption of ASU No.

2014-09 could impact the timing of revenue recognition through its services, gift card and various incentive programs. ASU No.

2014-09 will impact the Company’s method of recognizing gift card breakage income, which is currently recognized

based upon historical redemption patterns. ASU No. 2014-09 requires gift card breakage income to be recognized in

proportion to the pattern of rights exercised by the customer when the Company expects to be entitled to breakage. The

Company is also evaluating the principal versus agent considerations as it relates to certain arrangements with third parties that

could impact the presentation of gross or net revenue reporting. Other areas which could be impacted may be identified as the

Company continues its evaluation of ASU No. 2014-09. The Company plans to adopt ASU No. 2014-09 on January 29, 2018

using the modified retrospective transition method.


[Emphasis added]



107

……

Based on our analysis thus far, we believe the impact of adopting the new guidance will be immaterial to our annual and interim

financial statements. The primary impacts we have identified thus far are:

▪ Minor changes to the timing of recognition of revenues related to gift cards and loyalty programs;

▪ Changes to certain immaterial revenues that are currently reported on a gross basis, to be reported on a net basis (with

no change in timing of recognition) with consequently no impacts to earnings; and

▪ The balance sheet presentation of our sales returns reserve, which will be shown as a separate asset and liability

versus the current net presentation.

In addition, we expect adoption to lead to increased footnote disclosures, particularly with regard to revenue related balance sheet

accounts and revenue by channel and category. We also expect the adoption and consequent changes to our procedures and

methodologies to require adjustments to our internal controls over financial reporting.

As interpretations of the new rules continue to evolve, we will continue to monitor developments and expect to finalize our

conclusions in the fourth quarter of fiscal 2018. We plan to adopt this standard in the first quarter of our fiscal 2019.

Providing we ultimately conclude that the impacts of adoption are immaterial, we would expect to use the modified

retrospective method. Under this method, we would recognize the cumulative effect of the changes in retained earnings at the

date of adoption, but would not restate prior periods.


[Emphasis added]



108Exhibit II – G Consumer products


i. Under the current guidance, companies account for sales incentives (e.g. rebates, collaborative funding arrangements,

etc.) at the later of the date at which the products are sold or the date at which the programs are offered. The new guidance

requires earlier recognition if the sales incentive is implied by companies’ customary business practices, even if companies

have not yet explicitly communicated the intent to make the payment to their customers.



▪ Molson Coors ▪ Modified ▪ No quantified impact was disclosed

▪ Coca Cola ▪ Modified ▪ No quantified impact was disclosed

▪ Procter & Gamble ▪ Still assessing ▪ High-level quantified impact on net sales was disclosed

Back to summary


109

…… We currently anticipate that we will utilize the cumulative effect transition method, however, this expectation

may change following the completion of our evaluation of the impact of this guidance on our financial statements.

We are currently in the process of evaluating the impact this new guidance will have on our financial statements and to our

revenue recognition policies, controls and procedures. Based on the work completed to-date and our evaluation of the

five-step approach outlined within the guidance, we do not believe that the new guidance will have a significant

impact to our core revenue generating activities. However, we currently anticipate that the new standard may impact

the presentation of certain cash payments made to customers, as well as the timing of recognition of certain

promotional discounts. Specifically, certain cash payments to customers are currently recorded within marketing,

general and administrative expenses in the consolidated statements of operations. Upon adoption of the new

guidance, we anticipate that many of these cash payments may not meet the specific criteria within the new guidance

of providing a “distinct” good or service, and therefore, would be required to be presented as a reduction of revenue.

Furthermore, upon adoption of the new guidance, certain of our promotional discounts, which are deemed variable

consideration under the new guidance, will be recognized at the time of the related shipment of product, which is

earlier than recognized under current guidance. We anticipate that this change in recognition timing will shift

financial statement recognition primarily amongst quarters, however, do not anticipate that the full-year impact will

be significant to our financial results.

We are continuing to evaluate the potential impact the new guidance will have on our financial statements. We have not fully

completed this evaluation and therefore, we may identify further impacts in addition to those identified above. We have begun

training related to the implications of the new guidance and commenced implementation efforts for areas of impact identified

to-date. As we further complete our evaluation process, we will update our discussion of the anticipated impacts of the new

standard as appropriate.

Exhibit II – G Consumer products (Cont’d)

[Emphasis added]



110Exhibit II – G Consumer products (Cont’d)

…... We plan to adopt the standard on July 1, 2018. While we are currently assessing the impact of the new standard, our

revenue is primarily generated from the sale of finished product to customers. Those sales predominantly contain a

single delivery element and revenue is recognized at a single point in time when ownership, risks and rewards transfer.

The timing of revenue recognition is not materially impacted by the new standard. The provisions of the new standard

may impact the classification of certain payments to customers, moving an immaterial amount of such payments from

expense to a deduction from net sales. The impact would reduce net sales by less than 1%. We are still assessing the

impact on financial disclosures related to the new standard. We do not expect this new guidance to have any other

material impacts on our Consolidated Financial Statements.[Emphasis added]


…… The Company plans to adopt ASU 2014-09 and its amendments on a modified retrospective basis. We expect that

ASU 2014-09's broad definition of variable consideration will require the Company to estimate and record certain

variable payments resulting from collaborative funding arrangements, rebates and other pricing allowances earlier than

it currently does. While we do not expect this change to have a material impact on our net operating revenues on an

annual basis, we do expect that it will have an impact on our revenue in interim periods. Additionally, as a result of

electing certain of the practical expedients available under the ASU, the Company expects there will be some

reclassifications to or from net operating revenues, cost of goods sold, and selling, general and administrative

expenses. As we continue our assessment, the Company is also identifying and preparing to implement changes to our

accounting policies and practices, business processes, systems and controls to support the new revenue recognition and

disclosure requirements. We are in the process of quantifying the impacts that will result from applying the new guidance. Our

assessment will be completed during fiscal year 2017. [Emphasis added]

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