Note 1. Description of the Business and Summary of Significant Accounting Policies

Description of the Business

Steel Dynamics, Inc. (SDI), together with its subsidiaries (the company), is a domestic manufacturer of steel products and metals recycler. The company has three reporting segments: steel operations, metals recycling operations, and steel fabrication operations. Approximately 9% of the company’s workforce in six locations is represented by collective bargaining agreements, and agreements affecting 7% of the company’s employees at four locations expire during 2017.

Steel Operations Segment

Steel operations include the company’s Butler Flat Roll Division, Columbus Flat Roll Division – acquired September 16, 2014, The Techs galvanizing lines, Structural and Rail Division, Engineered Bar Products Division, Vulcan Threaded Products, Inc. – acquired August 1, 2016, Roanoke Bar Division, Steel of West Virginia, and Iron Dynamics (IDI), a liquid pig iron (scrap substitute) production facility that supplies solely the Butler Flat Roll Division. These operations include electric arc furnace steel mills, producing steel from ferrous scrap and scrap substitutes, utilizing continuous casting, automated rolling mills and eleven downstream coating lines, and several bar processing lines. Steel operations accounted for 72%, 69%, and 63% of the company’s consolidated net sales during 2016, 2015, and 2014, respectively.

Butler and Columbus Flat Roll Divisions sell a broad range of sheet steel products, such as hot roll, cold roll and coated steel products, including a wide variety of specialty products, such as light gauge hot roll, galvanized, Galvalume®, and painted products. The Techs is comprised of three galvanizing lines which sell specialized galvanized sheet steels used in non-automotive applications. The Structural and Rail Division sells structural steel beams and pilings to the construction market, as well as standard‑grade and premium rail to the railroad industry. The Engineered Bar Products Division primarily sells engineered, special-bar-quality and merchant-bar-quality rounds, round‑cornered squares, and smaller-diameter round engineered bars. Vulcan Threaded Products Inc. (Vulcan), acquired August 1, 2016, produces threaded rod products and also cold drawn and heat treated bar. The Roanoke Bar Division primarily sells merchant steel products, including angles, channels and flats, merchant rounds, and reinforcing bar. Steel of West Virginia primarily sells beams, channels and specialty steel sections. The company’s steel operations sell directly to end-users and service centers. These products are used in numerous industry sectors, including the construction, automotive, manufacturing, transportation, heavy and agriculture equipment, and pipe and tube (including OCTG) markets.

Metals Recycling Operations Segment

Metals recycling operations consists solely of OmniSource Corporation (OmniSource), and includes both ferrous and nonferrous processing, transportation, marketing, brokerage, and consulting services. Metals recycling operations accounted for 15%, 19% and 25% of the company’s consolidated net sales during 2016, 2015, and 2014, respectively.

Steel Fabrication Operations Segment

Steel fabrication operations include the company’s eight New Millennium Building Systems’ joist and deck plants located throughout the United States and in Northern Mexico. Revenues from these plants are generated from the fabrication of trusses, girders, steel joists and steel deck used within the non-residential construction industry. Steel fabrication operations accounted for 9% of the company’s consolidated net sales during 2016 and 2015, and 7% in 2014.

Other

Other operations consists of subsidiary operations that are below the quantitative thresholds required for reportable segments and primarily consist of our Minnesota ironmaking operations that were indefinitely idled in May 2015, and other smaller joint ventures. Also included in “Other” are certain unallocated corporate accounts, such as the company’s senior secured credit facility, senior notes, certain other investments and certain profit sharing expenses.

Our Minnesota ironmaking operations consist of Mesabi Nugget, (owned 83% by us); our wholly-owned iron concentrate and potential future iron mining operations, Mesabi Mining; and our wholly-owned (as of December 31, 2016) iron tailings operations, Mining Resources. The Minnesota ironmaking operations were indefinitely idled in May 2015. As of December 31, 2016, the company acquired all $15.1 million of the Mining Resources noncontrolling investor’s redeemable noncontrolling units for cancellation and discharge of all obligations owed to Mining Resources and termination of all existing agreements with the noncontrolling investor. Prior to this transaction, the company owned 82% of Mining Resources.

Note 1. Description of the Business and Summary of Significant Accounting Policies (Continued)

Summary of Significant Accounting Policies

Principles of Consolidation

The consolidated financial statements include the accounts of SDI, together with its wholly and majority-owned or controlled subsidiaries, after elimination of significant intercompany accounts and transactions. Noncontrolling interests represent the noncontrolling owner’s proportionate share in the equity, income, or losses of the company’s majority-owned or controlled consolidated subsidiaries.

Use of Estimates

These financial statements are prepared in conformity with accounting principles generally accepted in the United States, and accordingly, include amounts that require management to make estimates and assumptions that affect the amounts reported in the financial statements and in the notes thereto. Significant items subject to such estimates and assumptions include the carrying value of property, plant and equipment, intangible assets, and goodwill; valuation allowances for trade receivables, inventories and deferred income tax assets; unrecognized tax benefits; potential environmental liabilities; and litigation claims and settlements. Actual results may differ from these estimates and assumptions.

Revenue Recognition and Allowances for Doubtful Accounts

Except for the steel fabrication operations, the company recognizes revenues from sales and the allowance for estimated returns and claims from these sales at the time the title of the product transfers, upon shipment. Provision is made for estimated product returns and customer claims based on historical experience. If the historical data used in the estimates does not reflect future returns and claims trends, additional provision may be necessary. The company’s steel fabrication operations recognizes revenues from construction contracts utilizing a percentage of completion methodology based on steel tons used on completed units to date as a percentage of estimated total steel tons required for each contract. The allowance for doubtful accounts for all operating segments is based on the company’s best estimate of probable credit losses, along with historical experience.

Cash and Equivalents

Cash and equivalents include all highly liquid investments with a maturity of three months or less at the date of acquisition. Restricted cash is primarily funds held in escrow as required by various insurance and government organizations.

Inventories

Inventories are stated at lower of cost or market. Cost is determined using a weighted average cost method for raw materials and supplies, and on a first-in, first-out, basis for other inventory. Inventory consisted of the following at December 31 (in thousands):


	2016		2015
Raw materials	$	515,924	$	419,608
Supplies		383,134		396,349
Work in progress		103,606		90,486
Finished goods		272,547		242,947
Total inventories	$	1,275,211	$	1,149,390

Property, Plant and Equipment

Property, plant and equipment are stated at cost, which includes capitalized interest on construction in progress amounts, and is reduced by proceeds received from certain state and local government grants and other capital cost reimbursements. The company assigns each fixed asset a useful life ranging from 3 to 20 years for plant, machinery and equipment and 10 to 40 years for buildings and improvements. Repairs and maintenance are expensed as incurred. Depreciation is provided utilizing the straight-line depreciation methodology, or the units-of-production

depreciation methodology for certain production related assets, based on units produced, subject to a minimum and maximum level. Depreciation expense was $260.6 million, $263.2 million, and $229.4 million for the years ended December 31, 2016, 2015, and 2014, respectively. Refer to Impairment of Long-Lived Tangible and Definite-Lived Other Tangible Assets below in Note 1 for discussions regarding the impairments of various property, plant and equipment in 2016, 2015 and 2014.

Note 1. Description of the Business and Summary of Significant Accounting Policies (Continued)

The company’s property, plant and equipment consisted of the following at December 31 (in thousands):



	2016		2015
Land and improvements	$	311,005	$	328,739
Buildings and improvements		709,809		706,708
Plant, machinery and equipment		3,975,560		3,966,181
Construction in progress		70,615		76,074
		5,066,989		5,077,702
Less accumulated depreciation		2,279,774		2,126,492
Property, plant and equipment, net	$	2,787,215	$	2,951,210

Intangible Assets

The company’s intangible assets consisted of the following at December 31 (in thousands):


						Weighted
						Average
					Useful	Amortization
	2016		2015		Life	Period
Customer and scrap generator relationships	$	446,688	$	420,400	10 to 25 years	19 years
Trade names		130,550		85,000	15 to 25 years	18 years
Trade name		-		39,500	Indefinite
Other		1,415		-	3 years	3 years
		578,653		544,900		19 years
Less accumulated amortization		294,676		265,940
	$	283,977	$	278,960

Refer to “Impairment of Goodwill and Indefinite-Lived Intangible Assets” below in Note 1 for discussion regarding the 2015 impairment of the OmniSource trade name. The company utilizes an accelerated amortization methodology for customer and scrap generator relationships in order to follow the pattern in which the economic benefits of the amounts are anticipated to be consumed. Trade names are amortized using a straight-line methodology. The company determined that the useful lives were no longer indefinite and began to amortize The Techs $81.8 million trade name in January 2016, and the OmniSource $39.5 million trade name in November 2016. Amortization of intangible assets was $28.8 million, $24.2 million, and $26.5 million for the years ended December 31, 2016, 2015, and 2014, respectively. Estimated amortization expense, related to amortizable intangibles, for the years ending December 31 is as follows (in thousands):



2017	$	29,068
2018		26,434
2019		24,330
2020		22,204
2021		20,415
Thereafter		161,526
Total	$	283,977

Impairment of Long-Lived Tangible and Definite‑Lived Intangible Assets

The company reviews long-lived assets for impairment whenever events or changes in circumstances indicate the carrying amount of such assets may not be fully recoverable. Impairment losses are recorded on long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets’ carrying amounts. The impairment loss is measured by comparing the fair value of the asset to its carrying amount. The company considers various factors and determine whether an impairment test is necessary, including by way of examples, a significant and prolonged deterioration in operating results and/or projected cash flows, significant changes in the extent or manner in which an asset is used, technological advances with respect to assets which would potentially render them obsolete, our strategy and capital planning, and the economic climate in markets to be served.

Note 1. Description of the Business and Summary of Significant Accounting Policies (Continued)

A long-lived asset is classified as held for sale upon meeting specified criteria related to ability and intent to sell. An asset classified as held for sale is measured at the lower of its carrying amount or fair value less cost to sell. As of December 31, 2016 and 2015, the company reported $29.3 and $8.6 million, respectively, of assets held for sale within other current assets in our consolidated balance sheet. An impairment loss is recognized for any initial or subsequent write-down of the asset held for sale to its fair value less cost to sell. For assets determined to be classified as held for sale in the year ended December, 31, 2016, the asset carrying amounts approximated their fair value less cost to sell. The company recorded $10.3 million asset impairment charge in the consolidated statement of operations for assets determined to be classified as held for sale in the year ended December 31, 2015. The company determined fair value using Level 3 inputs as provided for under ASC 820, consisting of information provided by brokers and other external sources along with management’s own assumptions.

Significant events occurred during the fourth quarter of 2016, including the previously noted termination of all existing agreements with the Mining Resources noncontrolling investor, that represented impairment indicators related primarily to Mining Resources and Mesabi Mining fixed assets within our Minnesota ironmaking operations. These impairment indicators were substantively separate and different from the impairment indicators that existed within our Minnesota ironmaking operations in the fourth quarter of 2014, discussed below. Therefore, we undertook a fourth quarter 2016 assessment of the recoverability of the carrying amounts of primarily our Mining Resources and Mesabi Mining operation’s fixed assets. With the company’s outlook at the time of this 2016 assessment regarding future cash flows, the company concluded that the carrying amounts of the fixed assets were no longer fully recoverable, and they were in fact impaired. This 2016 assessment resulted in a non-cash asset impairment charge of $127.3 million, including amounts attributable to noncontrolling interests of $13.1 million, which reduced net income attributable to Steel Dynamics, Inc. by $72.9 million for the year ended December 31, 2016.

During the fourth quarter of 2014, our Minnesota ironmaking operations reached a steady operating state, indicating a consistency in the operations’ production capability, processes and cost structure, including the ability to utilize certain lower-cost raw materials. Given our outlook at that time regarding future operating costs and product pricing and resulting future cash flows, we concluded that the carrying amounts of primarily our Mesabi Nugget fixed assets, within our Minnesota ironmaking operations, were no longer fully recoverable, and were in fact impaired. This 2014 assessment resulted in non-cash asset impairment charge of $260.0 million, including amounts attributable to noncontrolling interests of $46.5 million, which reduced net income attributable to Steel Dynamics, Inc. by $132.6 million for the year ended December 31, 2014.

The carrying values of the impaired assets were adjusted to their estimated fair values at that time as determined primarily on the cost approach, as well as expected future discounted cash flows (an income approach), using Level 3 inputs as provided for under ASC 820.

Goodwill

The company’s goodwill is allocated to the following reporting units at December 31 (in thousands):


	2016		2015
Columbus Flat Roll Division – Steel Operations Segment	$	19,682	$	19,682
The Techs – Steel Operations Segment		142,783		142,783
Vulcan Threaded Products – Steel Operations Segment		7,824		-
Roanoke Bar Division – Steel Operations Segment		29,041		29,041
Butler Flat Roll Division, Structural and Rail Division, and Engineered
Bar Division – Metals Recycling Operations Segment		95,000		95,000
OmniSource – Metals Recycling Operations Segment		97,096		109,039
New Millennium Building Systems – Steel Fabrication Operations Segment		1,925		1,925
	$	393,351	$	397,470

In 2016, a $5.5 million OmniSource goodwill impairment charge was recorded in conjunction with OmniSource entering into a definitive sale agreement with a third-party pertaining to certain OmniSource long-lived assets (classified and reported as held for sale as of December 31, 2016), inventory and spare parts, as provided under ASC 350. OmniSource goodwill decreased an additional $6.4 million in 2016 in recognition of the 2016 tax benefit related to the normal amortization of the component of OmniSource tax-deductible goodwill in excess of book goodwill. In 2015, a $341.3 million OmniSource goodwill impairment charge was recorded pursuant to the company’s annual review for impairment of goodwill and indefinite-lived intangible assets, as discussed further under “Impairment of Goodwill and Indefinite-Lived Intangible Assets” below. Cumulative OmniSource goodwill impairment charges were $346.8 million at December 31, 2016, and $341.3 million at December 31, 2015.

Note 1. Description of the Business and Summary of Significant Accounting Policies (Continued)

Impairment of Goodwill and Indefinite‑Lived Intangible Assets

At least once annually (as of October 1) or when indicators of impairment exist, the company performs an impairment test for goodwill and other indefinite-lived intangible assets. Goodwill is allocated to various reporting units, which are generally one level below the company’s operating segments. The company utilizes a two-stepped approach to evaluate goodwill impairment. The first step of the test determines if there is potential goodwill impairment. In this step, the company compares the fair value of the reporting unit to its carrying amount (which includes goodwill). The fair value of the reporting unit is determined by using an estimate of future cash flows utilizing a risk-adjusted discount rate to calculate the net present value of future cash flows (income approach), and by using a market approach based upon an analysis of valuation metrics of comparable peer companies, Level 3 inputs as provided for under ASC 820. If the fair value exceeds the carrying value, there is no impairment. If the carrying amount exceeds the fair value, the company performs the second step of the test, which measures the amount of impairment loss to be recorded. In the second step, the company compares the carrying amount of the goodwill to the implied fair value of the goodwill based on the net fair value of the recognized and unrecognized assets and liabilities of the reporting unit to which it is allocated. If the implied fair value is less than the carrying value, an impairment loss is recorded to the extent that the fair value of the goodwill is less than its carrying value.

At least once annually (as of October 1) or when indicators of impairment exist, the company tests indefinite-lived intangible assets for impairment through the comparison of the fair value of the specific intangible asset with its carrying amount. The fair value of the intangible asset is determined by using an estimate of future cash flows attributable to the asset and a risk-adjusted discount rate to compute a net present value of future cash flows (income approach). If the fair value is less than the carrying value, an impairment loss is recorded in an amount equal to the excess in carrying value.

During the company’s 2015 annual goodwill and indefinite-lived intangible asset impairment analysis, we determined that the fair value of OmniSource was less than its carrying value, and upon the completion of the second step of the impairment analysis, that the goodwill and trade name indefinite-lived intangible assets were impaired. The decrease in OmniSource fair value from our 2014 impairment analysis was due primarily to the reduction in expected future cash flows based on management’s view at the time of the 2015 analysis of the weak longer-term global scrap commodity outlook. This outlook became clearer in the fourth quarter of 2015 from the longevity of: 1) the prolonged strength of the United States dollar decreasing scrap export volume (resulting in excess domestic supply); 2) currency devaluation contributing to China and Russia supplying alternative scrap materials to Turkey, versus those coming from the United States; and 3) slower global growth decreasing demand for scrap. While the scrap commodity outlook deteriorated throughout much of 2015, there were indicators of improvement during the year such as the restoration of the ratio of iron ore to scrap costs to a more historically consistent relationship, as well as a mid-year scrap pricing increase, versus the monthly decreases experienced throughout much of the year, including large decreases in both the first and fourth quarters. Upon the fourth quarter decrease in selling prices and resulting metal spreads, we concluded that the impact of the factors noted above were longer-term, which resulted in our reassessment of our future long-term cash flows. The OmniSource goodwill and trade name indefinite-lived intangible assets were written down to their respective fair values at that time, resulting in non-cash asset impairment charges of $341.3 million and $68.5 million, respectively, that are reflected in asset impairment charges in the consolidated statement of operations for the year ended December 31, 2015, within the metals recycling operations. No impairment was identified during the company’s 2016 annual goodwill and indefinite-lived intangible asset impairment analysis.

Equity‑Based Compensation

The company has several stock‑based employee compensation plans which are more fully described in Note 6. Compensation expense for restricted stock units, deferred stock units, restricted stock, and performance awards is recorded over the vesting periods using the fair value as determined by the closing fair market value of the company’s common stock on the grant date, and with respect to performance awards, an estimate of probability of award achievement during the performance period. The company recognizes forfeitures as they occur. Compensation expense for these stock‑based employee compensation plans was $30.4 million, $27.1 million, and $22.8 million for the years ended December 31, 2016, 2015, and 2014, respectively.

Income Taxes

The company accounts for income taxes and the related accounts under the liability method. Deferred tax liabilities and assets are determined based on the difference between the financial statement and tax bases of assets and liabilities using enacted rates expected to be in effect during the year in which the basis differences reverse.

Note 1. Description of the Business and Summary of Significant Accounting Policies (Continued)

Earnings Per Share

Basic earnings per share is based on the weighted average shares of common stock outstanding during the period. Diluted earnings per share assumes the weighted average dilutive effect of common share equivalents outstanding during the period applied to the company’s basic earnings per share. Common share equivalents represent potentially dilutive restricted stock units, deferred stock units, and stock options, and in 2014 dilutive shares related to the company’s convertible subordinated debt; and are excluded from the computation in periods in which they have an anti-dilutive effect. There were no anti-dilutive common stock equivalents as of and for the years ended December 31, 2016, and 2014. There were 1.5 million anti-dilutive common stock equivalents as of and for the year ended December 31, 2015.

The following table presents a reconciliation of the numerators and the denominators of the company’s basic and diluted earnings per share computations for the years ended December 31 (in thousands, except per share data):


	2016						2015
	Net Income		Shares		Per Share		Net Loss		Shares		Per Share
	(Numerator)		(Denominator)		Amount		(Numerator)		(Denominator)		Amount
Basic earnings per share	$	382,115		243,576	$	1.57	$	(130,311)		242,017	$	(0.54)
Dilutive restricted stock and deferred
stock units, and stock options		-		1,722				-		-
Diluted earnings per share	$	382,115		245,298	$	1.56	$	(130,311)		242,017	$	(0.54)


	2014
	Net Income		Shares		Per Share
	(Numerator)		(Denominator)		Amount
Basic earnings per share	$	157,024		232,547	$	0.68
Dilutive restricted stock and deferred
stock units, and stock options		-		1,828
5.125% convertible senior notes		4,327		7,703
Diluted earnings per share	$	161,351		242,078	$	0.67

Concentration of Credit Risk

Financial instruments that potentially subject the company to significant concentrations of credit risk principally consist of temporary cash investments and accounts receivable. The company places its temporary cash investments with high credit quality financial institutions and companies, and limits the amount of credit exposure from any one entity. The company is exposed to credit risk in the event of nonpayment by customers. The company mitigates its exposure to credit risk, which it generally extends initially on an unsecured basis, by performing ongoing credit evaluations and taking further action if necessary, such as requiring letters of credit or other security interests to support the customer receivable. Management’s estimation of the allowance for doubtful accounts is based upon known credit risks, historical loss experience and current economic conditions affecting the company’s customers. Customer accounts receivable are charged off when all collection efforts have been exhausted and the amounts are deemed uncollectible. Heidtman Steel Products (Heidtman), a related party, accounted for 3% and 5% of the company’s net accounts receivable at December 31, 2016, and 2015, respectively.

Derivative Financial Instruments

The company recognizes all derivatives as either assets or liabilities in the consolidated balance sheets and measures those instruments at fair value. Derivatives that are not designated as hedges must be adjusted to fair value through earnings. Changes in the fair value of derivatives that are designated as hedges, depending on the nature of the hedge, are recognized as either an offset against the change in fair value of the hedged balance sheet item in the case of fair value hedges or as other comprehensive income in the case of cash flow hedges, until the hedged item is recognized in earnings. The ineffective portion of a derivative’s change in fair value is immediately recognized in earnings. The company offsets fair value amounts recognized for derivative instruments executed with the same counterparty under master netting agreements.

Note 1. Description of the Business and Summary of Significant Accounting Policies (Continued)

In the normal course of business, the company has derivative financial instruments in the form of forward contracts in various commodities, may have involvement with derivative financial instruments related to managing fluctuations in foreign exchange rates, and in the past has had derivative financial instruments related to managing fluctuations in interest rates. At the time of acquiring these financial instruments, the company designates and assigns these instruments as hedges of specific assets, liabilities or anticipated transactions. When hedged assets or liabilities are sold or extinguished, or the anticipated transaction being hedged is no longer expected to occur, the company recognizes the gain or loss on the designated hedged financial instrument.

The company routinely enters into forward contracts in various commodities, primarily nonferrous metals (specifically aluminum and copper) in our metals recycling operations, to reduce exposure to commodity related price fluctuations. The company does not enter into these derivative financial instruments for speculative purposes.

Recently Adopted/Issued Accounting Standards

In March 2016, the FASB issued Improvement to Employee Share-based Payment Accounting (ASU 2016-09), which simplifies several aspects of accounting for share-based payment transactions, including recognizing excess tax benefits and deficiencies as income tax expense or benefit in the income statement and as operating activities within the statement of cash flows, and an option to recognize gross stock compensation expense with actual forfeitures recognized as incurred. This new guidance is effective for annual and interim periods beginning after December 15, 2016, but can be early adopted. The company early adopted the provisions of ASU 2016-09 effective December 31, 2016. As a result of adoption, an income tax benefit of $5.0 million has been recorded to reflect the excess tax benefit of share-based payments during 2016. Excess tax benefits in 2015 and 2014 recorded through equity (additional paid-in capital) were not changed, and thus tax expense as previously reported for 2015 and 2014 were not affected. Cash paid to tax authorities from shares withheld to satisfy the company’s statutory income tax withholding obligation of $13.4 million in 2016 are presented as financing activity in the 2016 statement of cash flows, and $8.8 million and $10.7 million in 2015 and 2014, respectively, were reclassified to financing activity from operating activity in the 2015 and 2014 statement of cash flows.

In August 2016, the FASB issued Statement of Cash Flows (Topic 230) Classification of Certain Cash Receipts and Cash Payments (ASU 2016-15), to clarify how entities should classify certain cash receipts and cash payments on the statement of cash flows. The new guidance is effective for years beginning after December 15, 2018, but can be early adopted, and is generally applied on a retrospective basis. The company early adopted the provisions of ASU 2016-15 effective December 31, 2016. As a result of adoption, cash payments for debt extinguishment costs of $13.4 million in 2016 have been included in repayments of current and long-term debt financing activity in the statement of cash flows, and $13.4 million of cash payments for debt extinguishment costs in 2015 have been reclassified from operating activity to repayments of current and long-term debt financing activity in the statement of cash flows. In addition, $7.0 million was reclassified from operating activity to investing activity in the 2015 statement of cash flows.

In May 2014, the FASB issued ASU 2014-09, which is codified in ASC 606, Revenue Recognition – Revenue from Contracts with Customers, which amends the guidance in former ASC 605, Revenue Recognition. FASB has since issued clarifying guidance in the form of ASU 2016-08, Revenue from Contracts with Customers: Principal versus Agent Consideration (Reporting Revenue Gross versus Net), ASU 2016-10, Revenue from Contract with Customers : Identifying Performance Obligations and Licensing, and ASU 2016-12, Revenue from Contracts with Customers: Narrow-Scope Improvements and Practical Expedients, collectively (ASC 606). The core principle of ASC 606 is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASC 606 also requires additional disclosures to help users of financial statements better understand the nature, amount, timing, and potential uncertainty of revenue that is recognized. ASC 606 guidance is effective for annual and interim periods beginning after December 15, 2017, but can be early adopted for annual and interim periods ending after December 15, 2016, using a full retrospective or modified retrospective approach. The company is currently working through an adoption plan and has identified current revenue streams and initially analyzed those revenue streams pursuant to the new accounting requirements. The company intends to complete the adoption plan during the second half of 2017, including final determination of whether the accounting impact of ASC 606 significantly differs from the company’s current revenue accounting, evaluating and concluding on the timing and method of adoption and related disclosure, and determine whether implementation of the new standard may affect functions, processes and systems within the company. Based on our analysis within the adoption plan completed to date, the company preliminarily does not believe there will be significant change in the amount or timing of revenue recognized under the new standard, or significant changes required to the company’s functions, processes or systems. The company preliminarily intends to adopt ASU 2014-09 in the first quarter of 2018. These preliminary assessments may however change as we complete the adoption plan.

In July 2015, the FASB issued ASU 2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory (ASU 2015-11), which requires an entity to measure inventory at the lower of cost and net realizable value, rather than at the lower of cost or market. This new guidance is effective for annual and interim periods beginning after December 15, 2016, but can be early adopted. The company will adopt ASU 2015-11 as required in the first quarter of 2017 on a prospective basis, and thus does not believe adoption will have a significant impact on its financial condition, results of operations, or cash flow.

Note 1. Description of the Business and Summary of Significant Accounting Policies (Continued)

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842): which establishes a new lease accounting model that requires lessees to recognize a right of use asset and related lease liability for most leases having lease terms of more than 12 months (ASU 2016-02). Leases with a term of 12 months or less will be accounted for similar to existing guidance for operating leases. This new guidance is effective for annual and interim periods beginning after December 15, 2018, but can be early adopted. The company is currently evaluating the impact of the provisions of ASU 2016-02, including the timing of adoption.