Summary of Significant Accounting Policies

Basis of Presentation

The consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States ("U.S. GAAP").

Revision of Previously Issued Financial Statements

The Company identified an error in the accounting for certain costs capitalized into inventory that did not constitute inventoriable costs in its historical financial statements. Costs incorrectly capitalized in ending inventory were $49 million and $42 million as of December 31, 2017 and 2016.

The Company evaluated the effect of this item as well as the items discussed below on prior periods under the guidance of SEC Staff Accounting Bulletin (SAB) No. 99, “Materiality” and determined the amounts were not material, individually or in the aggregate, to previously issued financial statements. The Company also evaluated the effect of correcting these items through a cumulative adjustment to our financial statements and concluded, based on the guidance within SEC SAB No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements”, it was appropriate to revise our previously issued financial statements to correct these errors. The Company also revised for other immaterial errors including (i) capitalization errors related to construction-in-process; (ii) errors related to the estimation of warranty and rebate liabilities; (iii) errors related to the cash flow presentation for borrowings and repayments on revolving lines of credit (net versus gross); (iv) errors related to currency on certain non-income tax transactions; and (v) errors surrounding the misclassification of translation adjustments within accumulated other comprehensive income. These adjustments related to various line items as shown in the tables below. As a result, certain amounts in the consolidated financial statements have been revised, and will be revised for interim periods in future filings, in order to correct for these errors. These revisions have also been reflected in Note 22, Quarterly Financial Data (Unaudited) to show the effects in the unaudited quarterly financial statements.

Reclassifications: Certain amounts in the prior years have been aggregated or disaggregated to conform to current year presentation. These reclassifications have no effect on previously reported earnings before income taxes and noncontrolling interests or net income, other comprehensive income (loss), current or total assets, current or total liabilities, and the cash provided (used) by operating, investing or financing activities within the consolidated statements of cash flows.

The following tables present the effect of these reclassifications and revisions for the financial statement line items adjusted in the affected periods included within this annual financial report:



	Year Ended December 31, 2017
	As Reported		Reclasses			As Reclassified			Revisions			As Revised
	(Millions, except per share amounts)
Consolidated statement of income
Revenues
Net sales and operating revenues	$	9,274	$	—		$	9,274		$	—		$	9,274
Costs and expenses
Cost of sales (exclusive of depreciation and amortization)	7,809		—			7,809			3			7,812
Selling, general, and administrative	636		—			636			2			638
Depreciation and amortization	224		—			224			2			226
Engineering, research, and development	158		—			158			—			158
Goodwill impairment charge	11		—			11			—			11
	8,838		—			8,838			7			8,845
Other expense (income)
Loss on sale of receivables	5		—			5			—			5
Non-service pension and postretirement benefit costs	—		16			16			—			16
Loss on extinguishment of debt	—		1			1			—			1
Equity in (earnings) losses of nonconsolidated affiliates, net of tax	—		1			1			—			1
Other expense (income), net	14		(17		)	(3		)	1			(2		)
	19		1			20			1			21
Earnings before interest expense, income taxes, and noncontrolling interests	417		(1		)	416			(8		)	408
Interest expense	73		(1		)	72			—			72
Earnings before income taxes and noncontrolling interests	344		—			344			(8		)	336
Income tax expense (benefit)	70		—			70			1			71
Net income	274		—			274			(9		)	265
Less: Net income attributable to noncontrolling interests	67					67			—			67
Net income attributable to Tenneco Inc.	$	207	$	—		$	207		$	(9	)	$	198
Earnings per share
Weighted average shares of common stock outstanding —
Basic earnings per share of common stock	$	3.93	$	—		$	3.93		$	(0.18	)	$	3.75
Diluted earnings per share of common stock	$	3.91	$	—		$	3.91		$	(0.18	)	$	3.73



	Year Ended December 31, 2017
	As Reported		Reclasses		As Reclassified		Revisions			As Revised
Consolidated statement of comprehensive income	(Millions)
Net income	$	274	$	—	$	274	$	(9	)	$	265
Other comprehensive income (loss)—net of tax
Foreign currency translation adjustment	99		—		99		7			106
Defined benefit plans	27		—		27		(10		)	17
	126		—		126		(3		)	123
Comprehensive income (loss)	400		—		400		(12		)	388
Less: Comprehensive income (loss) attributable to noncontrolling interests	69		—		69		—			69
Comprehensive income (loss) attributable to common shareholders	$	331	$	—	$	331	$	(12	)	$	319



	Year Ended December 31, 2016
	As Reported		Reclasses			As Reclassified			Revisions			As Revised
	(Millions, except per share amounts)
Consolidated statement of income
Revenues
Net sales and operating revenues	$	8,599	$	—		$	8,599		$	(2	)	$	8,597
Costs and expenses
Cost of sales (exclusive of depreciation and amortization)	7,116		—			7,116			10			7,126
Selling, general, and administrative	513		—			513			1			514
Depreciation and amortization	212		—			212			1			213
Engineering, research, and development	154		—			154			(1		)	153
	7,995		—			7,995			11			8,006
Other expense (income)
Loss on sale of receivables	5		—			5			—			5
Non-service pension and postretirement benefit costs	—		84			84			—			84
Loss on extinguishment of debt	—		24			24			—			24
Other expense (income), net	83		(84		)	(1		)	—			(1		)
	88		24			112			—			112
Earnings before interest expense, income taxes, and noncontrolling interests	516		(24		)	492			(13		)	479
Interest expense	92		(24		)	68			—			68
Earnings before income taxes and noncontrolling interests	424		—			424			(13		)	411
Income tax expense (benefit)	—		—			—			(4		)	(4		)
Net income	424		—			424			(9		)	415
Less: Net income attributable to noncontrolling interests	68		—			68			—			68
Net income attributable to Tenneco Inc.	$	356	$	—		$	356		$	(9	)	$	347
Earnings per share
Weighted average shares of common stock outstanding —
Basic earnings per share of common stock	$	6.36	$	—		$	6.36		$	(0.16	)	$	6.20
Diluted earnings per share of common stock	$	6.31	$	—		$	6.31		$	(0.16	)	$	6.15



	Year Ended December 31, 2016
	As Reported			Reclasses		As Reclassified			Revisions			As Revised
Consolidated statement of comprehensive income	(Millions)
Net income	$	424		$	—	$	424		$	(9	)	$	415
Other comprehensive income (loss)—net of tax
Foreign currency translation adjustment	(45		)	—		(45		)	(11		)	(56		)
Defined benefit plans	41			—		41			10			51
	(4		)	—		(4		)	(1		)	(5		)
Comprehensive income (loss)	420			—		420			(10		)	410
Less: Comprehensive income (loss) attributable to noncontrolling interests	64			—		64			—			64
Comprehensive income (loss) attributable to common shareholders	$	356		$	—	$	356		$	(10	)	$	346



	December 31, 2017
	As Reported			Reclasses			As Reclassified			Revisions			As Revised
Consolidated balance sheet	(Millions)
Current assets:
Cash and cash equivalents	$	315		$	—		$	315		$	—		$	315
Restricted cash	3			—			3			—			3
Receivables:
Customer notes and accounts, net	1,294			—			1,294			—			1,294
Other	27			—			27			—			27
Inventories	869			—			869			(49		)	820
Prepayments and other current assets	291			—			291			(3		)	288
Total current assets	2,799			—			2,799			(52		)	2,747
Property, plant and equipment, net	1,615			79			1,694			(3		)	1,691
Long-term receivables, net	9			—			9			—			9
Goodwill	49			—			49			—			49
Intangibles, net	22			—			22			—			22
Investments in nonconsolidated affiliates	—			2			2			—			2
Deferred income taxes	204			—			204			9			213
Other assets	144			(81		)	63			—			63
Total assets	$	4,842		$	—		$	4,842		$	(46	)	$	4,796

Short-term debt, including current maturities of long-term debt	$	83		$	20		$	103		$	—		$	103
Accounts payable	1,705			(123		)	1,582			—			1,582
Accrued compensation and employee benefits				141			141			—			141
Accrued income taxes	45			(20		)	25			2			27
Accrued interest	14			(14		)	—			—			—
Accrued liabilities	287			(287		)	—			—			—
Other	132			(132		)	—			—
Accrued expenses and other current liabilities				415			415			9			424
Total current liabilities	2,266			—			2,266			11			2,277
Long-term debt	1,358			—			1,358			—			1,358
Deferred income taxes	11			—			11			—			11
Pension and postretirement benefits	268			—			268			—			268
Deferred credits and other liabilities	155			—			155			3			158
Commitments and contingencies
Total liabilities	4,058			—			4,058			14			4,072
Redeemable noncontrolling interests	42						42			—			42
Tenneco Inc. shareholders’ equity:
Preferred stock—$0.01 par value; none issued	—			—			—			—			—
Class A voting common stock—$0.01 par value; shares issued: (2018—71,675,379; 2017—66,033,509)	1			—			1			—			1
Additional paid-in capital	3,112			—			3,112			—			3,112
Accumulated other comprehensive loss	(541		)	—			(541		)	3			(538		)
Accumulated deficit	(946		)	—			(946		)	(63		)	(1,009		)
	1,626			—			1,626			(60		)	1,566
Shares held as treasury stock—at cost: 2018 and 2017—14,592,888 shares	(930		)	—			(930		)	—			(930		)
Total Tenneco Inc. shareholders’ equity	696			—			696			(60		)	636
Noncontrolling interests	46			—			46			—			46
Total equity	742			—			742			(60		)	682
Total liabilities, redeemable noncontrolling interests and equity	$	4,842		$	—		$	4,842		$	(46	)	$	4,796



	Year Ended December 31, 2017
	As Reported			Reclasses			As Reclassified			Revisions			As Revised
Consolidated statements of cash flow	(Millions)
Operating Activities
Net income	$	274		$	—		$	274		$	(9	)	$	265
Net cash provided by operating activities	517			—			517			—			517

Investing Activities
Net cash used by investing activities	(300		)	—			(300		)	—			(300		)

Financing Activities
Proceeds from term loans and notes	—			137			137			23			160
Repayments of term loans and notes	—			(19		)	(19		)	(17		)	(36		)
Retirement of long-term debt	(19		)	19			—			—			—
Issuance of long-term debt	137			(137		)	—			—			—
Borrowings on revolving lines of credit	—			—			—			6,664			6,664
Payments on revolving lines of credit	—			—			—			(6,737		)	(6,737		)
Net increase (decrease) in revolver borrowings	(67		)	—			(67		)	67			—
Net cash provided (used) by financing activities	$	(251	)	$	—		$	(251	)	$	—		$	(251	)



	Year Ended December 31, 2016
	As Reported			Reclasses			As Reclassified			Revisions			As Revised
Consolidated statements of cash flow	(Millions)
Operating Activities
Net income	$	424		$	—		$	424		$	(9	)	$	415
Net cash provided by operating activities	374			—			374			—			374

Investing Activities
Net cash used by investing activities	(229		)	—			(229		)	—			(229		)

Financing Activities
Proceeds from term loans and notes	—			509			509			20			529
Repayments of term loans and notes	—			(531		)	(531		)	(14		)	(545		)
Retirement of long-term debt	(531		)	531			—			—			—
Issuance of long-term debt	509			(509		)	—			—			—
Borrowings on revolving lines of credit	—			—			—			5,417			5,417
Payments on revolving lines of credit	—			—			—			(5,221		)	(5,221		)
Net increase (decrease) in revolver borrowings	202			—			202			(202		)	—
Net cash provided (used) by financing activities	$	(86	)	$	—		$	(86	)	$	—		$	(86	)



	Year Ended December 31, 2017
	As Reported			Revisions			As Revised
Consolidated statements of shareholders' equity	(Millions)
Accumulated Deficit
Balance January 1	$	(1,100	)	$	(54	)	$	(1,154	)
Net income attributable to Tenneco Inc.	207			(9		)	198
Cash dividends declared	(53		)	—			(53		)
Balance December 31	$	(946	)	$	(63	)	$	(1,009	)
Accumulated Other Comprehensive Loss
Balance January 1	$	(665	)	$	6		$	(659	)
Other comprehensive loss—net of tax:
Foreign currency translation adjustment	97			7			104
Defined benefit plans	27			(10		)	17
Balance December 31	$	(541	)	$	3		$	(538	)
Total Tenneco Inc. Shareholders' Equity
Balance January 1	$	573		$	(48	)	$	525
Net income attributable to Tenneco Inc.	207			(9		)	198
Other comprehensive loss—net of tax:
Foreign currency translation adjustment	97			7			104
Defined benefit plans	27			(10		)	17
Comprehensive income	331			(12		)	319
Stock-based compensation expense	14			—			14
Cash dividends	(53		)	—			(53		)
Treasury stock	(169		)	—			(169		)
Balance December 31	$	696		$	(60	)	$	636
Total Equity
Balance January 1	$	620		$	(48	)	$	572
Net income	238			(9		)	229
Other comprehensive loss—net of tax:
Foreign currency translation adjustment	96			7			103
Defined benefit plans	27			(10		)	17
Comprehensive income	361			(12		)	349
Stock-based compensation expense	14			—			14
Cash dividends	(53		)	—			(53		)
Treasury stock	(169		)	—			(169		)
Distributions declared to noncontrolling interests	(31		)	—			(31		)
Balance December 31	$	742		$	(60	)	$	682



	Year Ended December 31, 2016
	As Reported			Revisions			As Revised
Consolidated statements of shareholders' equity	(Millions)
Accumulated Deficit
Balance January 1	$	(1,456	)	$	(45	)	$	(1,501	)
Net income attributable to Tenneco Inc.	356			(9		)	347
Balance December 31	$	(1,100	)	$	(54	)	$	(1,154	)
Accumulated Other Comprehensive Loss
Balance January 1	$	(665	)	$	7		$	(658	)
Other comprehensive loss—net of tax:
Foreign currency translation adjustment	(41		)	(11		)	(52		)
Defined benefit plans	41			10			51
Balance December 31	$	(665	)	$	6		$	(659	)
Total Tenneco Inc. shareholders' equity
Balance January 1	$	425		$	(38	)	$	387
Net income attributable to Tenneco Inc.	356			(9		)	347
Other comprehensive loss—net of tax:
Foreign currency translation adjustment	(41		)	(11		)	(52		)
Defined benefit plans	41			10			51
Comprehensive income	356			(10		)	346
Stock-based compensation expense	17			—			17
Treasury stock	(225		)	—			(225		)
Balance December 31	$	573		$	(48	)	$	525
Total Equity
Balance January 1	$	464		$	(38	)	$	426
Net income	388			(9		)	379
Other comprehensive loss—net of tax:
Foreign currency translation adjustment	(43		)	(11		)	(54		)
Defined benefit plans	41			10			51
Comprehensive income	386			(10		)	376
Stock-based compensation expense	17			—			17
Treasury stock	(225		)	—			(225		)
Distribution declared to noncontrolling interests	(22		)	—			(22		)
Balance December 31	$	620		$	(48	)	$	572

Summary of Significant Accounting Policies

Principles of Consolidation: The Company consolidates into its financial statements the accounts of the Company, all wholly owned subsidiaries, and any partially owned subsidiary it has the ability to control. Control generally equates to ownership percentage, whereby investments more that 50% owned are consolidated, investments in affiliates of 50% or less but greater than 20% are accounted for using the equity method, and investments in affiliates of 20% or less are accounted for using the cost method. See Note 8, Investment in Nonconsolidated Affiliates.

The Company does not consolidate any entity for which it has a variable interest based solely on the power to direct the activities and significant participation in the entity's expected results that would not otherwise be consolidated based on control through voting interests. Further, its affiliates are businesses established and maintained in connection with its operating strategy and are not special purpose entities. All intercompany transactions and balances have been eliminated.

Use of Estimates: The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported therein. Due to the inherent uncertainty involved in making estimates, actual results reported in future periods may be based upon amounts that differ from these estimates.

Cash and Cash Equivalents: The Company considers all highly liquid investments with maturities of 90 days or less from the date of purchase to be cash equivalents. The carrying value of cash and cash equivalents approximate fair value.

Restricted Cash: The Company is required to provide cash collateral in connection with certain contractual arrangements and statutory requirements. The Company has $5 million and $3 million of restricted cash at December 31, 2018 and 2017 in support of these arrangements and requirements.

Notes and Accounts Receivable: Notes and accounts receivable are stated at net realizable value, which approximates fair value. Receivables are reduced by an allowance for amounts that may become uncollectible in the future. The allowance is an estimate based on historical collection experience, current economic and market conditions, and a review of the current status of each customer's trade accounts or notes receivable. A receivable is past due if payments have not been received within the agreed-upon invoice terms. Account balances are charged-off against the allowance when management determines the receivable will not be recovered.

The allowance for doubtful accounts on short-term and long-term accounts receivable was $17 million and $16 million at December 31, 2018 and 2017. The allowance for doubtful accounts on short-term and long-term notes receivable was zero at both December 31, 2018 and 2017.

Inventories: Inventories are stated at the lower of cost or net realizable value using the first-in, first-out (“FIFO”) or average cost methods. Work in process includes purchased parts such as substrates coated with precious metals. Cost of inventory includes direct materials, labor, and applicable manufacturing overhead costs. The value of inventories are reduced for excess and obsolescence based on management's review of on-hand inventories compared to historical and estimated future sales and usage. Inventory held at consignment locations is included in finished goods inventory as the Company retains full title and rights to the products.

Redeemable Noncontrolling Interests: The Company has noncontrolling interests with redemption features. These redemption features could require the Company to make an offer to purchase the noncontrolling interests at fair value in the event of a change in control of Tenneco Inc. or certain of its subsidiaries. As a result of the Acquisition, the Company acquired $10 million in redeemable noncontrolling interests (exclusive of interests related to a subsidiary in India) and triggered the related redemption features which provide the holders the option to require the Company to redeem the noncontrolling interests. The noncontrolling interest partners have elected not to require the Company to redeem their shares. The redemption of these redeemable noncontrolling interests is not solely within the Company's control. Accordingly, these noncontrolling interests are presented in the temporary equity section of the Company's consolidated balance sheets. The Company does not believe it is probable the redemption features related to these noncontrolling interest securities will be triggered as a change in control event is generally not probable until it occurs. As a result the noncontrolling interests have not been remeasured to redemption value.

In addition, the Company acquired $86 million in redeemable noncontrolling interests related to a subsidiary in India. The Company initiated the process to make a tender offer of the shares it does not own due to the change in control in accordance with local regulations triggered by the Acquisition. It is probable these shares will become redeemable during 2019 under the tender offer at a price that is representative of fair value and as a result the noncontrolling interest is presented in the temporary equity section of the Company’s consolidated balance sheets. At the Acquisition date, this redeemable noncontrolling interest was recorded at its estimated fair value based on the preliminary purchase price allocation. The carrying amount for this redeemable noncontrolling interest at December 31, 2018 is currently greater than the redemption value as evidenced by the tender offer price resulting in no adjustment to reflect the noncontrolling interest at redemption value.

At December 31, 2018, the Company had previously held redeemable noncontrolling interests of $35 million, for which the redemption is not solely within the Company's control and these noncontrolling interests are presented in the temporary equity section of the Company's consolidated balance sheets. The Company does not believe it is probable the redemption features related to these noncontrolling interest securities will be triggered as a change in control event is generally not probable until it occurs. As such, the noncontrolling interests have not been remeasured to redemption value.

The following is a rollforward of the activity in the redeemable noncontrolling interests for the years ended December 31, 2018, 2017 and 2016:



	December 31
	2018			2017			2016
	(Millions)
Balance January 1	$	42		$	40		$	41
Federal-Mogul acquisition	96			—			—
Net income attributable to redeemable noncontrolling interests	29			36			36
Other comprehensive (loss) income	(2		)	3			(2		)
Contributions received	6			—			—
Dividends declared	(33		)	(37		)	(35		)
Balance December 31	$	138		$	42		$	40

Long-Lived Assets: Long-lived assets, such as property, plant and equipment and definite-lived intangible assets are recorded at cost or fair value established at acquisition. Definite-lived intangible assets include customer relationships and platforms, patented and unpatented technology, and licensing agreements. Long-lived asset groups are evaluated for impairment when impairment indicators exist. If the carrying value of a long-lived asset group is impaired, an impairment charge is recorded for the amount by which the carrying value of the long-lived asset group exceeds its fair value. Depreciation and amortization are computed principally on a straight-line basis over the estimated useful lives of the assets for financial reporting purposes. Expenditures for maintenance and repairs are expensed as incurred.

Goodwill, net: Goodwill is determined as the excess of fair value over amounts attributable to specific tangible and intangible assets. Goodwill is evaluated for impairment annually, during the fourth quarter, or more frequently, if impairment indicators exist. An impairment indicator exists when a reporting unit's carrying value exceeds its fair value. When performing the goodwill impairment testing, a reporting units' fair value is based on valuation techniques using the best available information. The assessment of fair value utilizes a combination of the income approach and market approach. The impairment charge is the excess of the goodwill carrying value over the implied fair value of goodwill using a one-step quantitative approach.

Trade names and trademarks: Trade names and trademarks are stated at fair value established at acquisition or cost. These indefinite-lived intangible assets will be evaluated for impairment annually during the fourth quarter, or more frequently, if impairment indicators exist. An impairment exists when a trade name and trademarks' carrying value exceeds its fair value. The fair values of these assets are based upon the prospective stream of hypothetical after-tax royalty cost savings discounted at rates that reflect the rates of return appropriate for these intangible assets. The impairment charge is the excess of the assets carrying value over its fair value.

Pre-production Design and Development and Tooling Assets: The Company expenses pre-production design and development costs as incurred unless there is a contractual guarantee for reimbursement from the original equipment customer. Costs for molds, dies and other tools used to make products sold on long-term supply arrangements for which the Company has title to the assets are capitalized in property, plant and equipment and amortized to cost of sales over the shorter of the term of the arrangement or over the estimated useful lives of the assets. Costs for molds, dies and other tools used to make products sold on long-term supply arrangements for which the Company has a contractual guarantee for reimbursement or has the non-cancelable right to use the assets during the term of the supply arrangement from the customer are capitalized in prepayments and other current assets.

Prepayments and other current assets included $193 million and $142 million at December 31, 2018 and 2017, respectively, for in-process tools and dies being built for OE customers and unbilled pre-production design and development costs.

Internal Use Software Assets: Certain costs related to the purchase and development of software used in the business operations are capitalized. Costs attributable to these software systems are amortized over their estimated useful lives based on various factors such as the effects of obsolescence, technology, and other economic factors. Additions to capitalized software development costs, including payroll and payroll-related costs for those employees directly associated with developing and obtaining the internal use software, are classified as investing activities in the consolidated statements of cash flows.

Income Taxes: Deferred tax assets and liabilities are recognized on the basis of the future tax consequences attributable to temporary differences that exist between the financial statement carrying value of assets and liabilities and the respective tax values, and net operating losses ("NOL") and tax credit carryforwards on a taxing jurisdiction basis. Deferred tax assets and liabilities are measured using enacted tax rates that will apply in the years in which the temporary differences are expected to be recovered or paid. The effect on deferred tax assets and liabilities of a change in tax rates is recorded in the results of operations in the period that includes the enactment date under the law.

Deferred income tax assets are evaluated quarterly to determine if valuation allowances are required or should be adjusted. Valuation allowances are established in certain jurisdictions based on a more likely than not standard. The ability to realize deferred tax assets depends on the Company's ability to generate sufficient taxable income within the carryback or carryforward periods provided for in the tax law for each tax jurisdiction. The Company considers the various possible sources of taxable income when assessing the realization of its deferred tax assets. The valuation allowances recorded against deferred tax assets generated by taxable losses in certain jurisdictions will effect the provision for income taxes until the valuation allowances are released. The Company's provision for income taxes will include no tax benefit for losses incurred and no tax expense with respect to income generated in these jurisdictions until the respective valuation allowance is eliminated.

The Company records uncertain tax positions on the basis of a two-step process whereby it is determined whether it is more likely than not that the tax positions will be sustained based on the technical merits of the position, and for those tax positions that meet the more likely than not criteria, the largest amount of tax benefit that is greater than 50% likely to be realized upon ultimate settlement with the related tax authority is recognized.

The Company elected to account for Global Intangible Low-Taxed Income (“GILTI”) as a current-period expense when incurred. Therefore, the Company has not recorded deferred taxes for basis differences expected to reverse in the future periods.

Pension and other postretirement benefit plan obligations: Pensions and other postretirement employee benefit costs and related liabilities and assets are dependent upon assumptions used in calculating such amounts. These assumptions include discount rates, long term rate of return on plan assets, health care cost trends, compensation, and other factors. Actual results that differ from the assumptions used are accumulated and amortized over future periods, and accordingly, generally affect recognized expense in future periods. The cost of benefits provided by defined benefit pension and other postretirement plans is recorded in the period employees provide service. Future pension expense for certain significant funded benefit plans is calculated using an expected return on plan asset methodology.

Investments with registered investment companies, common and preferred stocks, and certain government debt securities are valued at the closing price reported on the active market on which the securities are traded. Corporate debt securities are valued by third-party pricing sources using the multi-dimensional relational model using instruments with similar characteristics. Hedge funds and the collective trusts are valued at net asset value (NAV) per share which are provided by the respective investment sponsors or investment advisers.

Revenue Recognition: The Company adopted Financial Accounting Standards Board ("FASB") Accounting Standards Update ("ASU") 2014-09 on January 1, 2018, which required it to recognize revenue when a customer obtains control rather than when substantially all risks and rewards of a good or service have been transferred. ASU 2014-09 was adopted by applying the modified retrospective method; see the Recently Adopted Accounting Standards section for additional information pertaining to the adoption of ASU 2014-09. The comparative information has not been adjusted and continues to be reported under the accounting standards in effect for those periods. The following accounting policies became effective upon the adoption of ASU 2014-09:

The Company accounts for a contract with a customer when it has approval and commitment from both parties, the rights of the parties are identified, payment terms are identified, the contract has commercial substance, and collectability of consideration is probable.

Revenue is recognized for sales to OE and aftermarket customers when transfer of control of the related good or service has occurred. Revenue from most OE and aftermarket goods and services is transferred to customers at a point in time. Contract terms with certain OE customers results in products and services being transferred over time due to the customized nature of some of the Company's products together with contractual provisions in certain customer contracts that provide the Company with an enforceable right to payment for performance completed to date. The Company considers an input measure (e.g., costs incurred to date relative to total estimated costs at completion) as a fair measure of progress for the recognition of over time revenue associated with these customized parts. A cost measure best depicts the means of transfer of goods to the customer, which occurs as the Company incurs costs to fulfill contracts.

The customer is invoiced once transfer of control has occurred and the Company has a right to payment. Typical payment terms vary based on the customer and the type of goods and services in the contract. The period of time between invoicing and when payment is due is not significant. Amounts billed and due from customers are classified as receivables on the consolidated balance sheets. Standard payment terms are less than one year and the Company has elected the practical expedient to not assess whether a contract has a significant financing component if the payment terms are less than one year.

Performance Obligations: The majority of the Company's customer contracts with OE and aftermarket customers are long-term supply arrangements. The performance obligations are established by the enforceable contract, which is generally considered to be the purchase order but in some cases could be the delivery release schedule. The purchase order, or related delivery release schedule, is of a duration of less than one year. As such, the Company applies the practical expedient and does not disclose information about remaining performance obligations that have original expected durations of one year or less, for which work has not yet been performed.

Rebates: The Company accrues for rebates pursuant to specific arrangements with certain customers, primarily in the aftermarket. Rebates generally provide for payments to customers based upon the achievement of specified purchase volumes and are recorded as a reduction of sales as earned by such customers.

Product returns: Certain aftermarket contracts with customers include terms and conditions that result in a customer right of return that is accounted for on a gross basis. For these contracts the Company has recorded a refund liability and return asset within "Prepayments and other current assets."

Shipping and handling costs: Shipping and handling costs associated with outbound freight after control of a product has transferred to a customer are accounted for as a fulfillment cost and are included in cost of sales in the consolidated statements of income.

Sales and sales related taxes: The Company collects and remits taxes assessed by various governmental authorities that are both imposed on and concurrent with revenue-producing transactions with its customers. These taxes may include, but are not limited to, sales, use, value-added, and some excise taxes. The collection and remittance of these taxes is reported on a net basis.

Contract Balances: Contract assets primarily relate to the Company’s rights to consideration for work completed but not billed at the reporting date on contracts with customers. The contract assets are transferred to receivables when the rights become unconditional. Contract liabilities primarily relate to contracts where advance payments or deposits have been received, but performance obligations have not yet been met, and therefore, revenue has not been recognized. There have been no impairment losses recognized related to any receivables or contract assets arising from the Company’s contracts with customers.

Engineering, Research, and Development: The Company records engineering, research, and development costs ("R&D") net of customer reimbursements as they are considered a recovery of cost.

Advertising and Promotion Expenses: The Company expenses advertising and promotional expenses as incurred and these expenses were $36 million, $40 million, and $40 million for the years ended December 31, 2018, 2017, and 2016.

Foreign currency translation: Exchange adjustments related to foreign currency transactions and translation adjustment for foreign subsidiaries whose functional currency is the U.S. dollar are reflected in the consolidated statements of income. Translation adjustments of foreign subsidiaries for which local currency is functional currency are reflected in the consolidated balance sheets as a component of accumulated other comprehensive income (loss). Transaction gains and losses arising from fluctuations in currency exchange rates on transactions denominated in currencies other than the functional currency are recognized in earnings as incurred, except for those intercompany balances which are designated as long-term investments. The amounts recorded in cost of sales in the consolidated statements of income for foreign currency transactions included $15 million of gains for the year ended December 31, 2018, $4 million of losses for the year ended December 31, 2017 and $1 million of gains for the year ended December 31, 2016.

Asset Retirement Obligations: The Company records asset retirement obligations (ARO) when liabilities are probable and amounts can be reasonably estimated. The Company's primary ARO activities relate to the removal of hazardous building materials at its facilities.

Derivative Financial Instruments: For derivative instruments to qualify as hedging instruments, they must be designated as a fair value hedge, cash flow hedge or a hedge of a net investment in a foreign operation. Gains and losses related to a hedge are either recognized in income immediately to offset the gain or loss on the hedged item or are deferred and reported as a component of accumulated other comprehensive income (loss) and subsequently recognized in earnings when the hedged item affects earnings. The change in fair value of the ineffective portion of a derivative financial instrument, determined using the hypothetical derivative method, is recognized in earnings immediately. The gain or loss related to derivative financial instruments not designated as hedges are recognized immediately in earnings. Cash flows related to hedging activities are included in the operating section of the consolidated statements of cash flows.

New Accounting Pronouncements

Adoption of New Accounting Standards

Revenue recognition: The Company adopted ASU No. 2014-09, as incorporated into Accounting Standards Codification (ASC) Topic 606, Revenue from Contracts with Customers ("ASC 606"), on January 1, 2018, using the modified retrospective application method under which the cumulative effect is recognized in equity at the date of initial application. Therefore, the comparative information has not been adjusted and continues to be reported under previous guidance. ASC 606 has been applied to all contracts at the date of initial application. The details of significant changes and quantitative effect of the changes are disclosed below.

Product returns: The Company previously recognized product returns as a reduction in revenue based on the estimated product return rate. Under ASC 606, the Company continues to recognize this liability but also recognizes the value of the inventory to be returned.

Timing of revenue recognition: The Company previously recognized revenue when title and risk of loss passed to the customer. Upon the adoption of ASC 606, there was a change in the pattern of revenue recognition for certain customized parts where the Company has a right to payment. As a result of the adoption, the revenue from these contracts is now being recognized over-time because the customized parts are considered to be assets with limited alternative use and the Company has an enforceable right to payment for work completed to date. The Company considers the costs incurred (input method) as a fair measure of progress for the over-time recognition of revenue associated with these customized parts.

The cumulative effect of the adoption was recognized as a decrease to accumulated deficit of $1 million and the changes made to the consolidated January 1, 2018 opening consolidated balance sheets for the adoption of ASC Topic 606 were as follows:



	Balance at December 31, 2017			Over-time recognition			Balance at January 1, 2018
Consolidated Balance Sheets	(Millions)
Assets
Inventory	$	820		$	(5	)	$	815
Prepayments and other current assets	$	288		$	6		$	294
Equity
Accumulated deficit	$	(1,009	)	$	1		$	(1,008	)

The following tables summarize the effects of adopting ASC Topic 606 on the Company’s consolidated financial statements as of and for the year ended December 31, 2018:



	December 31, 2018
	As Reported			Product returns			Over-time recognition			Balances Without Adoption of ASC Topic 606
	(Millions)
Consolidated Balance Sheets
Assets
Inventory	$	2,245		$	—		$	8		$	2,253
Prepayments and other current assets	$	590		$	(44	)	$	(9	)	$	537
Liabilities
Accrued expenses and other current liabilities	$	1,001		$	(44	)	$	—		$	957
Equity
Accumulated deficit	$	(1,013	)	$	—		$	(1	)	$	(1,014	)



	Year Ended December 31, 2018
	As Reported		Product returns			Over-time recognition			Balances Without Adoption of ASC Topic 606
	(Millions)
Consolidated Statements of Income
Revenues
Net sales and operating revenues	$	11,763	$	2		$	3		$	11,768
Cost and expenses
Cost of sales (exclusive of depreciation and amortization)	$	10,071	$	(2	)	$	(3	)	$	10,066

For the year ended December 31, 2018, there would have been no change to "Net cash provided from (used by) operating activities'' under prior accounting principles.

Income taxes: In October 2016, the FASB issued ASU 2016-16, Income Taxes—Intra Entity Transfers of Assets Other Than Inventory (Topic 740). The new standard changes the accounting for income taxes when a company transfers certain tangible and intangible assets, such as equipment or intellectual property, between entities in different tax jurisdictions. The new standard does not change the current accounting for the income taxes related to transfers of inventory. This standard is effective for the Company for its financial statements issued for annual periods beginning after December 15, 2017, and interim periods within those annual periods. The Company adopted this ASU on January 1, 2018 using the modified retrospective method. The cumulative effect of the adoption was recognized as an increase to accumulated deficit of $1 million.

Retirement Benefits: Effective January 1, 2018, the Company adopted FASB ASU 2017-07, Retirement Benefits. As a result of adoption, the non-service cost components of net periodic pension and postretirement benefit cost previously presented in cost of sales and selling, general, and administrative expense have been reclassified to non-service pension and postretirement benefit cost. These financial statements have been retrospectively adjusted to reflect this change in accounting principle for the years ended December 31, 2017 and 2016.

The following tables summarize the effects of adopting the new standard on our consolidated financial statements:



	Year Ended December 31, 2017
	Prior to Change in Accounting Principle			Effective of Accounting Change			After Change in Accounting Principle
	(Millions)
Consolidated Statements of Income
Cost of Sales	$	7,815		$	(3	)	$	7,812
Selling, general, and administrative	$	650		$	(12	)	$	638
Non-service pension and postretirement benefit costs	$	—		$	16		$	16
Other (income) expense	$	(1	)	$	(1	)	$	(2	)



	Year Ended December 31, 2016
	Prior to Change in Accounting Principle		Effective of Accounting Change			After Change in Accounting Principle
	(Millions)
Consolidated Statements of Income
Cost of Sales	$	7,133	$	(7	)	$	7,126
Selling, general, and administrative	$	590	$	(76	)	$	514
Non-service cost pension and other postretirement benefits	$	—	$	84		$	84
Other expense	$	—	$	(1	)	$	(1	)

Deferred Purchase Price: Effective January 1, 2018, the Company adopted ASU 2016-15, Statement of Cash Flow—Classification of certain cash receipts and cash payments (Topic 230). This ASU addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice. The retrospective adoption of this ASU resulted in the reclassification of cash received to settle the deferred purchase price of factored receivables to an investing activity in the consolidated statement of cash flows. Prior to adoption this amount would have been recorded as an operating activity in the consolidated statement of cash flows. The Company also now presents the transfer of trade receivables in exchange for a beneficial interest in the factored receivables as a non-cash investing activity.

Restricted Cash: Effective January 1, 2018, the Company adopted ASU 2016-18, Statement of Cash Flows—Restricted Cash (Topic 230) to eliminate diversity in practice in the presentation of restricted cash and restricted cash equivalents in the statement of cash flows. Under this standard, the change in restricted cash is no longer presented as an investing activity in the consolidated statement of cash flows.

The following tables summarize the effects of adopting ASU 2016-18 and ASU 2016-15 on our consolidated statements of cash flows for the years ended December 31, 2017 and 2016:.



	Year Ended December 31, 2017
	Prior to Change in Accounting Principle			Effect of ASU 2016-18		Effect of ASU 2016-15			After Change in Accounting Principle
	(Millions)
Consolidated Statements of Cash Flows
Decrease (increase) in receivables	$	31		$	—	$	(112	)	$	(81	)
Net cash provided by operating activities	629			—		(112		)	517
Change in restricted cash	(1		)	1		—			—
Proceeds from deferred purchase price of factored receivables	—			—		112			112
Net cash used by investing activities	(413		)	1		112			(300		)
Decrease in cash, cash equivalents and restricted cash	(32		)	1		—			(31		)
Cash, cash equivalents and restricted cash, January 1	347			2		—			349
Cash, cash equivalents and restricted cash, December 31	$	315		$	3	$	—		$	318



	Year Ended December 31, 2016
	Prior to Change in Accounting Principle			Effect of ASU 2016-18		Effect of ASU 2016-15			After Change in Accounting Principle
	(Millions)
Consolidated Statements of Cash Flows
Increase in receivables	$	(215	)	$	—	$	(110	)	$	(325	)
Net cash provided by operating activities	484			—		(110		)	374
Change in restricted cash	(1		)	1		—			—
Proceeds from deferred purchase price of factored receivables	—			—		110			110
Net cash used by investing activities	(340		)	1		110			(229		)
Increase in cash, cash equivalents and restricted cash	60			1		—			61
Cash, cash equivalents and restricted cash, January 1	287			1		—			288
Cash, cash equivalents and restricted cash, December 31	$	347		$	2	$	—		$	349

Accounting Standards Issued But Not Yet Adopted

Intangibles: In August 2018, the FASB issued ASU 2018-15, Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. The amendments in this update align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). The accounting for the service element of a hosting arrangement that is a service contract is not affected by the amendments in this update. The amendments in this update are effective for interim and annual periods for the Company beginning on January 1, 2020, with early adoption permitted. The amendments in this update should be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption. The Company is currently evaluating the potential effect of this new guidance on its consolidated financial statements.

Retirement benefits: In August 2018, the FASB issued ASU 2018-14, Compensation-Retirement Benefits-Defined Benefit Plans-General (Subtopic 715-20). The amendments in this update remove disclosures that no longer are considered cost beneficial, clarify the specific requirements of disclosures, and add disclosure requirements identified as relevant. The amendments in this update are effective for fiscal years ending after December 15, 2020 with early adoption permitted. The Company is currently evaluating the potential effect of this new guidance on its consolidated financial statements.

Fair value measurements: In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820). The new guidance modifies disclosure requirements related to fair value measurement. The amendments in this ASU are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Implementation on a prospective or retrospective basis varies by specific disclosure requirement. Early adoption is permitted. The standard also allows for early adoption of any removed or modified disclosures upon issuance of this ASU while delaying adoption of the additional disclosures until their effective date. The Company is currently evaluating the potential effect of this new guidance on its consolidated financial statements.

Comprehensive income: In February 2018, the FASB issued ASU 2018-02, Income Statement—Reporting Comprehensive Income (Topic 220). The amendments in this update allow a reclassification from accumulated other comprehensive income (loss) to accumulated deficit for stranded tax effects resulting from the Tax Cuts and Jobs Act ("TCJA"). Consequently, the amendments allow for an election to eliminate the stranded tax effects resulting from the TCJA and will improve the usefulness of information reported to financial statement users. However, because the amendments only relate to the reclassification of the income tax effects of the TCJA, the underlying guidance that requires the effect of a change in tax laws or rates be included in income from continuing operations is not affected. The amendments in this update also require certain disclosures about stranded tax effects. The amendments in this update are effective for all entities for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. The Company has elected not to adopt the optional reclassification.

Leases: In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). This update supersedes the lease requirements in Topic 840, Leases. The objective of Topic 842 is to establish the principles that lessees and lessors shall apply to report useful information to users of financial statements about the amount, timing, and uncertainty of cash flow arising from a lease. For public business entities, the standard is effective for financial statements issued for annual periods beginning after December 15, 2018, and interim periods within those annual periods. The Company will adopt this update on January 1, 2019 using the modified retrospective method without the recasting of comparative periods’ financial information, as permitted by the transition guidance.

The Company is finalizing its implementation efforts including final review of lease arrangements and completion of its system implementations. The Company is still quantifying the effect of adoption but does not anticipate a material effect to the consolidated statements of income; however, it does expect a material effect on the consolidated balance sheets as it recognizes the right-of-use assets and liabilities for operating leases.

The Company intends to adopt the package of practical expedients that allow companies to not reassess and will carry forward historical conclusions related to contracts that contain leases, existing lease classification, and initial direct costs. It does not intend to adopt the hindsight practical expedient and has also made an accounting policy election to exempt leases with an initial term of twelve months or less from balance sheets recognition. Instead, short-term leases will be expensed over the lease term. As a part of the implementation efforts, the Company has reviewed its internal control structure and does not anticipate its internal control framework will materially change, but rather existing internal controls will be modified and augmented, as necessary.