DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION

12 Months Ended

Dec. 31, 2018

Description of Business and Basis of Presentation [Abstract]

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) learning solutions 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 offers subscription based research, data and analytical products, including credit ratings produced by MIS, credit research, quantitative credit scores and other analytical tools, economic research and forecasts, business intelligence and company information products, and commercial real estate data and analytical tools. 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 learning solutions and certification programs.

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

Adoption of New Accounting Standards

In the first quarter of 2017, the Company adopted ASU No. 2016-16, “Accounting for Income Taxes (Topic 740): Intra-Entity Asset Transfers of Assets Other than Inventory.” Under previous guidance, the tax effects of intra-entity asset transfers (intercompany sales) were deferred until the transferred asset was sold to a third party or otherwise recovered through use. The new guidance eliminates the exception for all intra-entity sales of assets other than inventory. Upon adoption, a cumulative-effect adjustment is recorded in retained earnings as of the beginning of the period of adoption. The net impact upon adoption is a reduction to retained earnings of $4.6 million. The Company does not expect any material impact on its future operations as a result of the adoption of this guidance.

In the first quarter of 2017, the Company adopted ASU No. 2016-09 “Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting”. As required by ASU No. 2016-09, Excess Tax Benefits or shortfalls recognized on stock-based compensation are reflected in the consolidated statement of operations as a component of the provision for income taxes on a prospective basis. Prior to the adoption of this ASU, Excess Tax Benefits and shortfalls were recorded to capital surplus within shareholders’ equity (deficit). The impact of this adoption was a $38.1 million and a $39.5 million benefit to the provision for income taxes for the years end December 31, 2018 and December 31, 2017 respectively.

Additionally, in accordance with this ASU, Excess Tax Benefits or shortfalls recognized on stock-based compensation are classified as operating cash flows in the consolidated statement of cash flows, and the Company has applied this provision on a retrospective basis. Under previous accounting guidance, the Excess Tax Benefits or shortfalls were shown as a reduction to operating activity and an increase to financing activity. Furthermore, the Company has elected to continue to estimate the number of stock-based awards expected to vest, rather than accounting for award forfeitures as they occur, to determine the amount of stock-based compensation cost recognized in each period. As a result of the change, net cash provided by operating activities was higher and net cash used in financing activities was lower by $38.1 million and $39.5 million for the years ended December 31, 2018 and December 31, 2017, respectively, than it would have been under the previous guidance.As a result of the change, net cash provided by operating activities was higher and net cash used in financing activities was lower by $38.1 million and $39.5 million for the years ended December 31, 2018 and December 31, 2017, respectively, than would have been reported under the previous guidance.The impact to the Company’s statement of cash flows for the year priorto the adoption of this provision of the ASU is set forth in the table below:

	As Reported December 31, 2016		Reclassification		December 31, 2016 As Adjusted
Net cash provided by operating activities	$	1,226.1	$	33.1	$	1,259.2
Net cash used in financing activities	$	(1,009.8)	$	(33.1)	$	(1,042.9)

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 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	Deferred revenue, Non-current portion of deferred revenue, Accounts receivable, Other assets
Increase to capitalized MA sales commissions (2)	$78	Other current assets, Other assets, Accounts payable and accrued liabilities
Capitalization of work-in-process for in-progress ratings	$9	Other current assets
Net impact of all other adjustments	$4	Various
Net increase in tax liability on the above	($43)	Deferred tax liabilities, net
Total post-tax adjustment	$156
(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 Accounting 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:

			Year Ended December 31, 2018
			As Reported		Under previous accounting guidance		Effect ofChangeHigher/(Lower)
Revenue			$	4,442.7	$	4,429.3	$	13.4
Expenses
	Operating			1,245.5		1,247.0		(1.5)
	Selling, general and administrative			1,080.1		1,088.9		(8.8)
	Restructuring			48.7		48.7		-
	Depreciation and amortization			191.9		191.9		-
	Acquisition-Related Expenses			8.3		8.3		-
		Total expenses		2,574.5		2,584.8		(10.3)
Operating income				1,868.2		1,844.5		23.7
Non-operating (expense) income, net
	Interest expense, net			(216.0)		(216.0)		-
	Other non-operating income, net			18.8		18.8		-
		Total non-operating (expense) income, net		(197.2)		(197.2)		-
Income before provision for income taxes				1,671.0		1,647.3		23.7
	Provision for income taxes			351.6		346.7		4.9
Net income				1,319.4		1,300.6		18.8
	Less: Net income attributable to noncontrolling interests			9.8		9.8		-
Net income attributable to Moody's			$	1,309.6	$	1,290.8	$	18.8
Earnings per share
	Basic		$	6.84	$	6.74	$	0.10
	Diluted		$	6.74	$	6.64	$	0.10
Weighted average shares outstanding
	Basic			191.6		191.6
	Diluted			194.4		194.4

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 Reported December 31, 2018		Under previous accounting guidance December 31, 2018		Effect of Change Higher/(Lower)
ASSETS
Current assets:
Cash and cash equivalents	$	1,685.0	$	1,685.0	$	-
Short-term investments		132.5		132.5		-
Accounts receivable, net of allowances		1,287.1		1,243.2		43.9
Other current assets		282.3		282.0		0.3
Total current assets:		3,386.9		3,342.7		44.2
Property and equipment, net		320.4		320.4		-
Goodwill		3,781.3		3,781.3		-
Intangible assets, net		1,566.1		1,566.1		-
Deferred tax assets, net		197.2		197.2		-
Other assets		274.3		191.4		82.9
Total assets	$	9,526.2	$	9,399.1	$	127.1
LIABILITIES, NONCONTROLLING INTERESTS AND SHAREHOLDERS' EQUITY
Accounts payable and accrued liabilities	$	695.2	$	694.5	$	0.7
Current portion of long-term debt		449.9		449.9		-
Deferred revenue		953.4		1,012.7		(59.3)
Total current liabilities		2,098.5		2,157.1		(58.6)
Non-current portion of deferred revenue		122.3		127.7		(5.4)
Long-term debt		5,226.1		5,226.1		-
Deferred tax liabilities, net		351.7		333.0		18.7
Unrecognized tax benefits		494.6		494.6		-
Other liabilities		576.5		576.4		0.1
Total liabilities		8,869.7		8,914.9		(45.2)
Shareholders' equity:
Common stock		3.4		3.4		-
Capital surplus		600.9		600.9		-
Retained earnings		8,594.4		8,422.1		172.3
Treasury stock		(8,312.5)		(8,312.5)		-
Accumulated other comprehensive loss		(426.3)		(426.3)		-
Total Moody's shareholders' equity		459.9		287.6		172.3
Noncontrolling interests		196.6		196.6		-
Total shareholders' equity		656.5		484.2		172.3
Total liabilities, noncontrolling interests and shareholders' equity	$	9,526.2	$	9,399.1	$	127.1

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.

				Year Ended December 31, 2018
				As Reported		Under previous accounting guidance		Effect of Change
Cash flows from operating activities
	Net income			$	1,319.4	$	1,300.6	$	18.8
	Reconciliation of net income to net cash provided by operating activities:
		Depreciation and amortization			191.9		191.9		-
		Stock-based compensation			130.3		130.3		-
		Deferred income taxes			(98.9)		(76.7)		(22.2)
		Changes in assets and liabilities:
			Accounts receivable		(136.1)		(109.0)		(27.1)
			Other current assets		(8.4)		(41.0)		32.6
			Other assets		(16.6)		(5.0)		(11.6)
			Accounts payable and accrued liabilities		(134.0)		(132.9)		(1.1)
			Restructuring liability		41.9		41.9		-
			Deferred revenue		138.9		126.3		12.6
			Unrecognized tax benefits and other non-current tax liabilities		58.6		58.6		-
			Other liabilities		(25.9)		(23.9)		(2.0)
	Net cash provided by operating activities			$	1,461.1	$	1,461.1	$	-

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.

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 statements of operations. The other components of net benefit cost are presented within non-operating (expense) income, net, within the statements 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 years ended December 31, 2018, 2017 and 2016 related to the adoption of this ASU are set forth in the table below:

	Year Ended December 31, 2018						Year Ended December 31, 2017
	As Reported		Under previous accounting guidance		Effect of Change		As Adjusted		Under previous accounting guidance		Effect of Change
Operating expenses	$	1,245.5	$	1,250.3	$	(4.8)	$	1,216.6	$	1,222.8	$	(6.2)
Selling, general and administrative expenses		1,080.1		1,084.3		(4.2)		985.9		991.4		(5.5)
Operating income		1,868.2		1,859.2		9.0		1,820.8		1,809.1		11.7
Interest expense, net		(216.0)		(196.7)		(19.3)		(208.5)		(188.4)		(20.1)
Other non-operating income (expense), net		18.8		8.5		10.3		3.7		(4.7)		8.4
							Year Ended December 31, 2016
							As Adjusted		Under previous accounting guidance		Effect of Change
Operating expenses							$	1,019.6	$	1,026.6	$	(7.0)
Selling, general and administrative expenses								931.2		936.4		(5.2)
Operating income								650.9		638.7		12.2
Interest expense, net								(157.3)		(137.8)		(19.5)
Other non-operating income (expense), net								64.4		57.1		7.3

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 on January 1, 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 a material impact on the Company’s financial statements for theyear ended December 31, 2018.

In March 2018, the FASB issued ASU No. 2018-05, "Income Taxes (Topic 740): Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118". This ASU adds SEC paragraphs to the codification pursuant to the SEC Staff Accounting Bulletin No. 118, which address the application of U.S. GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to finalize the calculations for the 2017 income tax effects of the Tax Act. This ASU provided entities with a one year measurement period from the December 22, 2017 enactment date, in order to complete the accounting for the effects of the Tax Act. The Company recorded a provisional estimate for the transition tax relating to the Tax Act in its financial statements for the year ended December 31, 2017, and subsequently refined its determination of the transition tax during the measurement period in 2018. The impact of the Company’s accounting for the Tax Act is more fully described in Note 16.

On January 1, 2018, the Company adopted ASU No. 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (a Consensus of the Emerging Issues Task Force)” on a retrospective basis. This ASU reduces diversity in practice in how certain transactions are reflected in the statement of cash flows. Pursuant to the adoption of this ASU, the Company reclassified $7.1 million in cash paid in 2017 relating to a Make-Whole provision upon the repayment of the Series 2007-1 Notes from cash flows used in operations to cash flows provided by financing activities.

During the second quarter of 2018, the Company early adopted ASU No. 2017-12, “Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities”. This ASU fosters enhanced transparency relating to risk management activities and simplifies the application of hedge accounting in certain circumstances. The adoption of this ASU did not have an impact on the Company’s financial statements at the date of adoption. Refer to Note 6 for further discussion on the prospective impact of this ASU on the Company’s financial statements.