Recent Accounting Pronouncements

With the exception of those discussed below, there have been no recent changes in accounting pronouncements issued by the Financial Accounting Standards Board (“FASB”) or adopted by the Company during the nine months ended October 31, 2016, that are of significance, or potential significance, to the Company.

Accounting Standards Adopted

In March 2016, the FASB issued Accounting Standards Update No. 2016-09 ("ASU 2016-09") regarding ASC Topic 718, “Improvements to Employee Share-Based Payment Accounting.” The new guidance requires excess tax benefits and tax deficiencies to be recorded in the income statement when the awards vest or are settled. In addition, cash flows related to excess tax benefits will no longer be separately classified as a financing activity apart from other income tax cash flows. The standard also increases the amount of shares an employer can withhold for tax purposes without triggering liability accounting, clarifies that all cash payments made on an employee's behalf for withheld shares should be presented as a financing activity in the statements of cash flows, and provides an entity-wide accounting policy election to account for forfeitures as they occur.

QAD elected to early adopt the new guidance in the third quarter of fiscal year 2017 which requires us to reflect any adjustments as of February 1, 2016, the beginning of the annual period that includes the interim period of adoption. The primary impact of adoption was the recognition of excess tax benefits in our provision for income taxes rather than paid-in capital for all periods in fiscal year 2017. Additional amendments to the accounting for income taxes resulted in the recognition of prior year unrealized excess tax benefits. This recognition resulted in an increase to our deferred tax assets of $2.2 million, an increase to valuation allowance $1.2 million and an offset to opening accumulated deficit of $1.0 million.

QAD elected to account for forfeitures as they occur using a modified retrospective transition method, which resulted in a cumulative-effect adjustment of $0.4 million to reduce the February 1, 2016 opening accumulated deficit. Additional amendments to the accounting for minimum statutory withholding tax requirements had no impact to opening accumulated deficit as of February 1, 2016 as QAD does not withhold more than the minimum statutory requirements.

We elected to apply the presentation requirements for cash flows related to excess tax benefits retrospectively to all periods presented which resulted in an increase to net cash provided by operating activities and a decrease to net cash used in financing of $0.3 million for the six months ended July 31, 2016. The presentation requirements for cash flows related to employee taxes paid for withheld shares had no impact to any of the periods presented in our consolidated cash flows statements since such cash flows have historically been presented as a financing activity.

With the adoption of the new standard we are required to revise our reported quarterly results for the six months ended July 31, 2016. Accordingly, this table reflects the retrospective adjustments made to beginning accumulated deficit and to the previously reported results for the six months ended July 31, 2016:

Condensed Consolidated Balance Sheets
				ASU 2016-09 Adoption Adjustments
(in thousands)	As Reported July 31, 20 16			February 1, 2016		For The Six Months Ended July 31, 2016			As Adjusted July 31, 20 16
Other current assets	$	18,369		$	—	$	(104	)	$	18,265
Deferred tax assets, net		12,156			995		—			13,151
Additional paid-in capital		194,943			388		(422	)		194,909
Accumulated deficit	$	(45,767	)	$	607	$	318		$	(44,842	)

Condensed Consolidated Statements of Operations

(in thousands, except per share data)	As Reported Six Months Ended July 31, 2016			ASU 2016-09 Adoption Adjustments			As Adjusted Six Months Ended July 31, 2016

Cost of revenue:
Subscription fees	$	12,945		$	(5	)	$	12,940
Maintenance and other		15,532			(21	)		15,511
Professional services		35,048			(47	)		35,001
Total cost of revenue		65,015			(73	)		64,942
Gross profit		70,160			73			70,233
Operating expenses:
Sales and marketing		34,322			(90	)		34,232
Research and development		22,283			(71	)		22,212
General and administrative		16,526			(37	)		16,489
Total operating expenses		73,462			(198	)		73,264
Operating loss		(3,302	)		271			(3,031	)
Loss before income taxes		(3,743	)		271			(3,472	)
Income tax benefit		(1,601	)		(47	)		(1,648	)
Net loss	$	(2,142	)	$	318		$	(1,824	)
Basic and diluted weighted average shares outstanding:
Class A		15,644			–			15,644
Class B		3,204			–			3,204
Basic and diluted net loss per share:
Class A	$	(0.12	)	$	0.02		$	(0.10	)
Class B	$	(0.10	)	$	0.02		$	(0.08	)

In April 2015, the FASB issued ASU 2015-03 -

Interest - Imputation of Interest (Subtopic 2015-03): Simplifying the Presentation of Debt Issuance Costs

which requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of the related debt liability instead of being presented as an asset, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by ASU 2015-03. This ASU is effective for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years and is to be implemented retrospectively. The Company adopted the provisions of this ASU in the first quarter of fiscal 2017. Adoption of this ASU did not have a material impact on the Company’s consolidated financial statements.

In August 2015, the FASB issued ASU 2015-15,

Interest-Imputation of Interest (Subtopic 835-30): Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line of Credit Arrangements

, given that the authoritative guidance within ASU 2015-03 for debt issuance costs does not address presentation or subsequent measurement of debt issuance costs related to line-of-credit arrangements. The SEC staff would not object to an entity deferring and presenting debt issuance costs as an asset and subsequently amortizing the deferred debt issuance costs ratably over the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings on the line-of-credit arrangement. The Company adopted the provisions of this ASU in the first quarter of fiscal 2017. Adoption of this ASU did not have an impact on the Company’s consolidated financial statements.

Accounting Standards

Not Yet

Adop

ted

In May 2014, the FASB issued accounting standard update, or ASU, 2014-09,

Revenue from Contracts with Customers

. The standard was issued to provide a single framework that replaces existing industry and transaction specific U.S. GAAP with a five-step analysis of transactions to determine when and how revenue is recognized. The accounting standard update will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. In August 2015, the FASB issued ASU 2015-14,

Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date,

to defer the effective date of ASU 2014-09 by one year. Therefore, ASU 2014-09 will become effective for the Company beginning in fiscal year 2019. Early adoption would be permitted for the Company beginning in fiscal year 2018. The standard permits the use of either the retrospective or cumulative transition method. The Company is currently evaluating the accounting, transition and disclosure requirements of the standard and cannot currently estimate the financial statement impact of adoption.

In November 2015, the FASB issued ASU 2015-17,

Balance Sheet Classification of Deferred Taxes

which requires deferred tax liabilities and assets be presented as noncurrent on the classified statement of financial position. ASU 2015-17 will be effective for the Company’s fiscal year beginning February 1, 2017. The standard permits the use of either prospective or retrospective application to all periods presented. The Company does not expect this adoption to have a significant impact on its consolidated financial statements.

In February 2016, the FASB issued ASU 2016-02,

Leases (Topic 842)

ASU 2016-02 requires companies to generally recognize on the balance sheet operating and financing lease liabilities and corresponding right-of-use assets. ASU 2016-02 is effective for the Company in its first quarter of fiscal 2020 on a modified retrospective basis and earlier adoption is permitted. The Company is currently evaluating the impact of the pending adoption of ASU 2016-02 on its consolidated financial statements and currently expects that most of its operating lease commitments will be subject to the new standard and recognized as operating lease liabilities and right-of-use assets upon adoption of ASU 2016-02.

In October 2016, the FASB issued ASU 2016-16,

Income Taxes: Intra-Entity Transfers of Assets Other than Inventory

which requires that entities recognize the income tax consequences of an intra-entity transfer of an asset, other than inventory, when the transfer occurs. ASU 2016-16 will be effective for the Company's fiscal year beginning February 1, 2018. The standard is required to be applied on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. The Company is currently evaluating the accounting, transition, and disclosure requirements of the standard.