2. NEW ACCOUNTING PRONOUNCEMENTS
Stock-Based Compensation
In May 2017, the Financial Accounting Standards Board
(“FASB”) issued Accounting Standards Update
(“ASU”) No. 2017-09 “Stock
Compensation (Topic 718), Scope of Modification Accounting”
to clarify when to account for a change to the terms or conditions
of a share-based payment award as a modification. Under the new
guidance, modification accounting is required only if the fair
value, the vesting conditions, or the classification of the award
(as equity or liability) changes as a result of the change in terms
or conditions. The effective date for the Company will be
January 1, 2018. The Company does not expect the adoption of
this standard to have a material effect on its financial position
or results of operations.
Financial Instruments
In June 2016, the FASB issued ASU No. 2016-13, “Financial
Instruments—Credit Losses (Topic 326): Measurement of Credit
Losses on Financial Instruments,” which requires measurement
and recognition of expected credit losses for financial assets
measured at amortized cost, including trade accounts receivable,
upon initial recognition of that financial asset using a
forward-looking expected loss model, rather than an incurred loss
model for credit losses. Credit losses relating to available-for-sale debt
securities should be recorded through an allowance for credit
losses when the fair value is below the amortized cost of the
asset, removing the concept of “other-than-temporary”
impairments. The effective date for the Company will be
January 1, 2020, with early adoption permitted. The Company is
currently evaluating the effect this ASU will have on its
consolidated financial statements and related disclosures.
Leases
In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic
842),” which requires lessees to record most leases on their
balance sheets, recognizing a lease liability for the obligation to
make lease payments and a right-of-use asset for the right
to use the underlying asset for the lease term. The effective date
for the Company will be January 1, 2019, with early adoption
permitted. The Company expects that most of its operating lease
commitments will be subject to this ASU and recognized as operating
lease liabilities and right-of-use assets upon
adoption with no material impact to its results of operations and
cash flows.
Revenue
In May 2014, the FASB issued ASU No. 2014-09, “Revenue from
Contracts with Customers (Topic 606)”. This ASU amends the
guidance for revenue recognition, creating the new Accounting
Standards Codification Topic 606 (“ASC 606”). ASC 606
requires entities to apportion consideration from contracts to
performance obligations on a relative standalone selling price
basis, based on a five-step model. Under ASC 606, revenue is
recognized when a customer obtains control of a promised good or
service and is recognized in an amount that reflects the
consideration which the entity expects to receive in exchange for
the good or service. In addition, ASC 606 requires disclosure of
the nature, amount, timing, and uncertainty of revenue and cash
flows arising from contracts with customers.
The Company has elected the full retrospective adoption model,
effective January 1, 2018. The Company’s quarterly
results beginning with the quarter ending March 31, 2018 and
comparative prior periods will be compliant with ASC 606. The
Company’s Annual Report on Form 10-K for the year ended
December 31, 2018 will be the Company’s first Annual
Report that will be issued in compliance with ASC 606.
The Company has made significant progress on quantifying the impact
of its adoption and identifying necessary changes to our policies,
processes, systems, and controls.
The Company expects the following impacts:
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Currently, the Company recognizes
revenue from term licenses and perpetual licenses with extended
payment terms over the term of the agreement as payments become due
or earlier if prepaid, provided all other criteria for revenue
recognition have been met, and any corresponding maintenance over
the term of the agreement. The adoption of ASC 606 will result in
revenue for performance obligations being recognized as they are
satisfied. Therefore, revenue from the term and perpetual license
performance obligations with extended payment terms is recognized
when control is transferred to the customer. Any unrecognized
license revenue from these arrangements, included in deferred
revenue at December 31, 2015, will not be recognized in
revenue in future periods but as a cumulative adjustment to
retained earnings. Further, term license revenue from new
arrangements executed in 2016 and 2017 will be recognized in full
in the year that control of the license is transferred to the
customer instead of over the term of the agreement. Revenue
from the maintenance performance obligations is expected to be
recognized on a straight-line basis over the contractual term. Due
to the revenue from term and perpetual licenses with extended
payment terms being recognized prior to amounts being billed to the
customer, the Company expects to recognize a net contract asset on
the balance sheet. |
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Currently, the Company allocates
revenue to licenses under the residual method when it has Vendor
Specific Objective Evidence (“VSOE”) for the remaining
undelivered elements, which allocates any future credits or
significant discounts entirely to the license. The adoption of ASC
606 will result in future credits, significant discounts, and
material rights under ASC 606, to be allocated to all performance
obligations based upon their relative selling price. Under ASC 606,
additional license revenue from the reallocation of such
arrangement considerations will be recognized when control is
transferred to the customer, which is generally upon delivery of
the license. |
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Currently, the Company does not have
VSOE for fixed price services, time and materials services in
certain geographical areas, and unspecified future products, which
results in revenue being deferred in such instances until such time
as VSOE exists for all undelivered elements or recognized ratably
over the longest performance period. The adoption of ASC 606
eliminates the requirement for VSOE and replaces it with the
concept of a stand-alone selling price. Once the transaction price
is allocated to each of the performance obligations, the Company
can recognize revenue as the performance obligations are delivered,
either at a point in time or over time. Under ASC 606, license
revenue will be recognized when control is transferred to the
customer, professional services revenue will be recognized over
time based on input or output measures that reflect the
Company’s performance on the contract. This will result in
the acceleration of professional services revenue when compared to
the current practice of ratable recognition for professional
services when there is a lack of VSOE. |
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Sales commissions and other third
party acquisition costs resulting directly from securing contracts
with customers are currently expensed when incurred. ASC 606 will
require these costs to be recognized as an asset when incurred and
to be expensed over the associated contract term. As a
practical expedient, if the term of the contract is one year or
less, the Company will expense these costs as incurred. The Company
expects this change to impact its multi-year cloud offerings and
term and perpetual licenses with additional rights of use that
extend beyond one year. |
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ASC 606 provides additional
accounting guidance for contract modifications whereby changes must
be accounted for either as a retrospective change (creating either
a catch up or deferral of past revenues), prospectively with a
reallocation of revenues amongst identified performance
obligations, or prospectively as separate contracts which will not
require any reallocation. This may result in a difference in the
timing of the recognition of revenue as compared to how contract
modifications are recognized currently. |
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There will be a corresponding effect
on tax liabilities in relation to all of the above impacts. |