DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION

3 Months Ended

Mar. 31, 2018

DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION

NOTE 1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION

Moody’s is a provider of (i) credit ratings; (ii) credit, capital markets and economic research, data and analytical tools; (iii) software solutions that support financial risk management activities; (iv) quantitatively derived credit scores; (v) financial services training and certification services; (vi) offshore financial research and analytical services; and (vii) company information and business intelligence products. Moody’s reports in two reportable segments: MIS and MA.

MIS, the credit rating agency, publishes credit ratings on a wide range of debt obligations and the entities that issue such obligations in markets worldwide. Revenue is primarily derived from the originators and issuers of such transactions who use MIS ratings in the distribution of their debt issues to investors. Additionally, MIS earns revenue from certain non-ratings-related operations which consist primarily of financial instrument pricing services in the Asia-Pacific region as well as revenue from ICRA’s non-ratings operations. The revenue from these operations is included in the MIS Other LOB and is not material to the results of the MIS segment.

The MA segment develops a wide range of products and services that support financial analysis and risk management activities of institutional participants in global financial markets. Within its RD&A business, MA distributes research and data developed by MIS as part of its ratings process, including in-depth research on major debt issuers, industry studies and commentary on topical credit-related events. The RD&A business also produces economic research and data and analytical tools such as quantitative credit risk scores as well as business intelligence and company information products. Within its ERS business, MA provides software solutions as well as related risk management services. The PS business provides offshore analytical and research services along with financial training and certification programs.

These interim financial statements have been prepared in accordance with the instructions to Form 10-Q and should be read in conjunction with the Company’s consolidated financial statements and related notes in the Company’s 2017 annual report on Form 10-K filed with the SEC on February 27, 2018. The results of interim periods are not necessarily indicative of results for the full year or any subsequent period. In the opinion of management, all adjustments (including normal recurring accruals) considered necessary for a fair presentation of financial position, results of operations and cash flows at the dates and for the periods presented have been included. The year-end consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America.

Certain reclassifications have been made to prior period amounts to conform to the current presentation.

Adoption of New Accounting Standards

On January 1, 2018, the Company adopted ASU No. 2014-09, “Revenue from Contracts with Customers (ASC Topic 606)” using the modified retrospective approach which Moody’s has elected to apply only to those contracts which were not completed as of January 1, 2018. Additionally, the Company has not retrospectively restated contract positions for contract modifications made prior to the adoption. ASU No. 2014-09 also includes updates related to the accounting for the deferral of incremental costs of obtaining or fulfilling a contract with a customer (“ASC Subtopic 340-40”). Hereunder, discussion of the provisions of ASC Topic 606 and ASC Subtopic 340-40 are both individually and collectively referred to as the “New Revenue Accounting Standard.” Results for reporting periods beginning on January 1, 2018 are presented under the guidance set forth in the New Revenue Accounting Standard, while prior period amounts have not been adjusted and continue to be reported in accordance with the previous accounting guidance.

The most significant impacts to the Company’s financial statements from adopting the New Revenue Accounting Standard are primarily related to: i) the accounting for certain installed software subscription revenue in MA whereby the license rights within the arrangement are recognized at the inception of the contract based on SSP with the remainder recognized over the subscription period (compared to ASC Topic 605 whereby all installed software subscription revenue was previously recognized over the subscription period); ii) the accounting for certain ERS and ESA revenue arrangements where VSOE was not available under ASC Topic 605 now results in the acceleration of revenue recognition (compared to ASC Topic 605 whereby revenue was deferred due to lack of VSOE until all elements without VSOE had been delivered); iii) sales commissions incurred in the MA segment will be capitalized and amortized over an extended period which is generally based upon the average economic life of products/services sold and incorporates anticipated subscription renewals (compared to previous accounting guidance whereby capitalized sales commissions were amortized over the committed subscription period only); iv) the immediate expensing of software implementation project costs to fulfill a contract for its ERS and ESA businesses which under previous accounting guidance were capitalized and expensed when related project revenue was recognized; v) the capitalization of work-in-process costs for in-progress MIS ratings at the end of each reporting period which under ASC Topic 605 were expensed as incurred; vi) the timing of when revenue for certain MIS ratings products is recognized; and vii) the estimation of variable consideration at contract inception whereas under ASC Topic 605 companies were not required to consider the amount of consideration for which it expected to be entitled.

The Company does not anticipate that applying the provisions of the New Revenue Accounting Standard will have a material impact to its 2018 consolidated Net Income. However, there could be quarterly fluctuations in the financial results of both MIS and MA, or there could be increases or decreases in revenues and expenses which would largely offset and not be material to total consolidated Net Income for the full year.

The table below provides detail relating to the adjustment to the Company’s retained earnings balance upon adoption of the New Revenue Accounting Standard:

Transition adjustment	Benefit to / (reduction of) January 1, 2018 Retained Earnings	Corresponding Balance Sheet Line Item
Recognition of MA deferred revenue / increase in MA unbilled receivables ⁽¹⁾	$108 million	Deferred revenue, Non-current portion of deferred revenue, Accounts receivable, Other assets
Increase to capitalized MA sales commissions ⁽²⁾	$78 million	Other current assets, Other assets, Accounts payable and accrued liabilities
Capitalization of work-in-process for in-progress ratings	$9 million	Other current assets
Net impact of all other adjustments	$4 million	Various
Net increase in tax liability on the above	($43 million)	Deferred tax liabilities, net
Total post-tax adjustment	$156 million
(1) Represents deferred revenue as of December 31, 2017 as well as amounts then unbilled that would have been recognized as revenue in 2017 or earlier if the New Revenue Standard was then in effect. These amounts will not be recognized as revenue in future statements of operations. Conversely, revenue will be recorded to the Company's statement of operations in 2018 under the New Revenue Accounting Standard, which otherwise would have been recognized in periods subsequent to 2018 if accounted for under ASC Topic 605.
(2) Represents sales commissions that would have been capitalized as of December 31, 2017 if the New Revenue Accounting Standard was then in effect, but had previously been expensed by the Company under the previous accounting guidance. These sales commissions, as well as sales commissions incurred in 2018 related to new sales and renewals, will be amortized to expense in the statements of operations beginning in 2018 over an extended period generally based upon the average economic life of the products sold or over the period in which implementation and advisory services will be provided.

The table below presents the cumulative effect of the changes made to the Company’s consolidated balance sheet at January 1, 2018 for the adoption of the New Revenue Accounting Standard:

			As reported December 31, 2017		Adjustment Due to New Revenue Accounting Standard		Balance at January 1, 2018
ASSETS
Current assets:
	Cash and cash equivalents		$	1,071.5	$	-	$	1,071.5
	Short-term investments			111.8		-		111.8
	Accounts receivable, net of allowances			1,147.2		16.8		1,164.0
	Other current assets			250.1		32.9		283.0
		Total current assets		2,580.6		49.7		2,630.3
Property and equipment, net				325.1		-		325.1
Goodwill				3,753.2		-		3,753.2
Intangible assets, net				1,631.6		-		1,631.6
Deferred tax assets, net				143.8		-		143.8
Other assets				159.9		71.3		231.2
		Total assets		8,594.2		121.0		8,715.2

LIABILITIES, NONCONTROLLING INTERESTS AND SHAREHOLDERS' (DEFICIT)/EQUITY
Current liabilities:
	Accounts payable and accrued liabilities			750.3		(0.8)		749.5
	Commercial paper			129.9		-		129.9
	Current portion of long-term debt			299.5		-		299.5
	Deferred revenue			883.6		(69.3)		814.3
		Total current liabilities		2,063.3		(70.1)		1,993.2
Non-current portion of deferred revenue				140.0		(8.0)		132.0
Long-term debt				5,111.1		-		5,111.1
Deferred tax liabilities, net				341.6		42.7		384.3
Unrecognized tax benefits				389.1		-		389.1
Other liabilities				664.0		0.3		664.3
		Total liabilities		8,709.1		(35.1)		8,674.0
Shareholders' (deficit) equity:
	Common stock			3.4		-		3.4
	Capital surplus			528.6		-		528.6
	Retained earnings			7,465.4		156.1		7,621.5
	Treasury stock			(8,152.9)		-		(8,152.9)
	Accumulated other comprehensive loss			(172.2)		-		(172.2)
		Total Moody's shareholders' (deficit) equity		(327.7)		156.1		(171.6)
	Noncontrolling interests			212.8		-		212.8
		Total shareholders' (deficit) equity		(114.9)		156.1		41.2
		Total liabilities, noncontrolling interests and shareholders' (deficit) equity	$	8,594.2	$	121.0	$	8,715.2

The below table presents the impacts on the Company’s statement of operations for the current reporting period from applying the provisions of the New Revenue Accounting Standard compared to the accounting standard in effect before the change:

			For the Three Months Ended March 31, 2018
			As Reported		Under previous accounting guidance		Effect ofChangeHigher/(Lower)
Revenue			$	1,126.7	$	1,126.4	$	0.3
Expenses
	Operating			314.9		315.5		(0.6)
	Selling, general and administrative			271.1		271.5		(0.4)
	Depreciation and amortization			49.1		49.1		-
	Acquisition-related expenses			0.8		0.8		-
		Total expenses		635.9		636.9		(1.0)
Operating income				490.8		489.5		1.3
Non-operating (expense) income, net
	Interest expense, net			(50.7)		(50.7)		-
	Other non-operating income (expense), net			1.0		1.0		-
		Total non-operating (expense) income, net		(49.7)		(49.7)		-
Income before provision for income taxes				441.1		439.8		1.3
	Provision for income taxes			64.3		63.5		0.8
Net income				376.8		376.3		0.5
	Less: Net income attributable to noncontrolling interests			3.9		3.9		-
Net income attributable to Moody's			$	372.9	$	372.4	$	0.5
Earnings per share
	Basic		$	1.95	$	1.95	$	-
	Diluted		$	1.92	$	1.91	$	0.01
Weighted average shares outstanding
	Basic			191.4		191.4
	Diluted			194.5		194.5

The below table presents the impacts on the Company’s consolidated balance sheet at the end of the current reporting period from applying the provisions of the New Revenue Accounting Standard compared to the accounting standard in effect before the change:

	As ReportedMarch 31, 2018		Under previous accounting guidance March 31, 2018		Effect ofChangeHigher/(Lower)
ASSETS
Current assets:
Cash and cash equivalents	$	1,277.3	$	1,277.3	$	-
Short-term investments		100.5		100.5		-
Accounts receivable, net of allowances		1,207.4		1,183.0		24.4
Other current assets		233.6		212.4		21.2
Total current assets:		2,818.8		2,773.2		45.6
Property and equipment, net		321.6		321.6		-
Goodwill		3,831.5		3,831.5		-
Intangible assets, net		1,641.6		1,641.6		-
Deferred tax assets, net		142.5		142.6		(0.1)
Other assets		258.0		182.8		75.2
Total assets	$	9,014.0	$	8,893.3	$	120.7

LIABILITIES, NONCONTROLLING INTERESTS AND SHAREHOLDERS' EQUITY
Accounts payable and accrued liabilities	$	532.6	$	532.5	$	0.1
Commercial paper		89.9		89.9		-
Current portion of long-term debt		299.7		299.7		-
Deferred revenue		998.7		1,065.6		(66.9)
Total current liabilities		1,920.9		1,987.7		(66.8)
Non-current portion of deferred revenue		127.8		135.0		(7.2)
Long-term debt		5,118.0		5,118.0		-
Deferred tax liabilities, net		382.2		348.7		33.5
Unrecognized tax benefits		490.9		490.9		-
Other liabilities		554.2		553.9		0.3
Total liabilities		8,594.0		8,634.2		(40.2)
Shareholders' equity:
Common stock		3.4		3.4		-
Capital surplus		506.6		506.6		-
Retained earnings		7,913.0		7,752.1		160.9
Treasury stock		(8,171.4)		(8,171.4)		-
Accumulated other comprehensive loss		(51.9)		(51.9)		-
Total Moody's shareholders' equity		199.7		38.8		160.9
Noncontrolling interests		220.3		220.3		-
Total shareholders' equity		420.0		259.1		160.9
Total liabilities, noncontrolling interests and shareholders' equity	$	9,014.0	$	8,893.3	$	120.7

The below table presents the impacts on various line items within the operating cash flow within the Company’s statement of cash flows for the current reporting period from applying the provisions of the New Revenue Accounting Standard compared to the accounting standard in effect before the change.

				For the Three Months Ended March 31, 2018
				As Reported		Under previous accounting guidance		Effect of Change
Cash flows from operating activities
	Net income			$	376.8	$	376.3	$	0.5
	Reconciliation of net income to net cash provided by operating activities:
		Depreciation and amortization			49.1		49.1		-
		Stock-based compensation			35.1		35.1		-
		Deferred income taxes			(4.2)		4.0		(8.2)
		Changes in assets and liabilities:
			Accounts receivable		(29.9)		(22.3)		(7.6)
			Other current assets		47.8		36.1		11.7
			Other assets		(14.5)		(10.6)		(3.9)
			Accounts payable and accrued liabilities		(224.2)		(229.4)		5.2
			Deferred revenue		167.7		164.5		3.2
			Unrecognized tax benefits and other non-current tax liabilities		(17.9)		(17.9)		-
			Other liabilities		5.7		6.6		(0.9)
	Net cash provided by operating activities			$	391.5	$	391.5	$	-

The New Revenue Accounting Standard did not have any impact on individual line items within investing or financing cash flows in the Company’s consolidated statement of cash flows. In 2018, the adoption of the New Revenue Accounting Standard will likely result in higher cash taxes as the cumulative catch-up adjustment to retained earnings is taxable and there is expected to be acceleration of revenue recognition under the New Revenue Accounting Standard.

On January 1, 2018, the Company adopted ASU No. 2017-07, “Compensation—Retirement Benefits (Topic 715), Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost”. As required by this ASU, the components of net periodic pension costs were disaggregated in the statement of operations on a retrospective basis. The Company has continued to reflect the service cost component in either Operating or SG&A expenses in Moody’s statement of operations. The other components of net benefit cost are presented within non-operating (expense) income, net, within the statement of operations. The adoption of this ASU has no impact on Net Income in the Company’s statements of operations. The impact to the Company’s statements of operations for the three months ended March 31, 2018 and March 31, 2017 related to the adoption of this ASU are set forth in the table below:

	For the Three Months Ended March 31, 2018						For the Three Months Ended March 31, 2017
	As Reported		Under previous accounting guidance		Effect of ChangeHigher/(Lower)		As Adjusted		Under previous accounting guidance		Effect of ChangeHigher/(Lower)
Operating expenses	$	314.9	$	316.3	$	(1.4)	$	275.3	$	277.4	$	(2.1)
Selling, general and administrative expenses		271.1		272.0		(0.9)		220.7		221.9		(1.2)
Operating income		490.8		488.5		2.3		446.7		443.4		3.3
Interest expense, net		(50.7)		(46.0)		4.7		(47.4)		(42.4)		5.0
Other non-operating income (expense), net		1.0		(1.4)		2.4		(7.7)		(9.4)		(1.7)

On January 1, 2018, the Company adopted ASU No. 2016-01 “Financial Instruments—Overall (Subtopic 825-10), Recognition and Measurement of Financial Assets and Financial Liabilities” (“ASU 2016-01”). The amendments in this ASU update various aspects of recognition, measurement, presentation and disclosures relating to financial instruments. Upon adoption, the Company recorded a $2.3 million cumulative adjustment to reclassify net unrealized gains on investments in equity securities previously classified as available-for-sale under the previous guidance from AOCI to retained earnings. Beginning in the first quarter of 2018, the Company will measure equity investments with readily determinable fair values (except those accounted for under the equity method, those that result in consolidation of the investee and certain other investments) at fair value and recognize any changes in fair value in net income. The adoption of this ASU did not have material impact on the Company’s financial statements for the three months ended March 31, 2018.