Note 2. Summary of Significant Accounting Policies

Basis of Presentation

The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All intercompany transactions and balances have been eliminated in consolidation.

Use of Estimates

The Company’s consolidated financial statements are prepared in accordance with US generally accepted accounting principles (“GAAP”). These accounting principles require the Company to make certain estimates, judgments, and assumptions. The Company believes that the estimates, judgments, and assumptions upon which it relies are reasonable based on information available to the Company at the time that these estimates, judgments, and assumptions are made. These estimates, judgments, and assumptions may affect the reported amounts of assets and liabilities as of the date of the consolidated financial statements, as well as the reported amounts of revenue and expenses in the periods presented. To the extent there are material differences between these estimates, judgments, or assumptions and actual results, the Company’s consolidated financial statements will be affected.

Foreign Currency

The functional currency of the Company’s wholly-owned subsidiaries is generally the applicable local currency. For these subsidiaries, the translation of their foreign currency into US dollars is performed for assets and liabilities using current foreign currency exchange rates in effect at the balance sheet date and for revenue and expense accounts using average foreign currency exchange rates for the appropriate operating period. Capital accounts and other balances designated as long-term in nature are translated at historical exchange rates. Translation gains and losses are included in stockholders’ (deficit) equity as a component of Accumulated other comprehensive (loss) income. Adjustments that arise from foreign currency exchange rate changes on transactions and balances denominated in a currency other than the local currency are included in Other (expense) income, net in the consolidated statements of operations. The Company’s UK subsidiaries maintain a significant portion of its cash balances in US dollars. As a result, the cash held in US dollars is re-measured into the subsidiary’s UK functional currency through an adjustment to income and then translated to the Company’s US dollar reporting currency through an adjustment to stockholders’ (deficit) equity for consolidated reporting purposes.

The Company recognized $6.9 million, $5.6 million, and $8.6 million of net non-operating foreign currency gains in 2016, 2015, and 2014, respectively, which are included in Other (expense) income, net in the consolidated statements of operations.

Cash and Cash Equivalents

The Company’s cash and cash equivalents balance is primarily comprised of cash held in demand deposit accounts at various financial institutions.

Allowance for Uncollectible Revenue

The Company records an allowance for uncollectible revenue, as a reduction in revenue, based on management’s analysis and estimates as to the collectability of accounts receivable, which generally is the result of customers’ ability to pay. Revenue under membership agreements is generally recognized ratably over the membership period, typically 12 months. Accordingly, the estimated allowance for uncollectible revenue is recorded against the amount of revenue that has been recognized. Accounts receivable that has not been recognized as revenue is recorded in deferred revenue. As part of its analysis, the Company examines its collections history, the age of the receivables in question, any specific member collection issues that it has identified, general market conditions, member concentrations, and current economic and industry trends. Accounts receivable balances are not collateralized.

Deferred Incentive Compensation

Incentive compensation paid to the Company’s employees related to the negotiation of new and renewal customer arrangements is deferred and amortized over the term of the arrangements as revenue is recognized.

Property and Equipment, Net

Property and equipment, net consists of furniture, fixtures, and equipment, leasehold improvements, capitalized computer software, and website development costs. Property and equipment are stated at cost, less accumulated depreciation. Furniture, fixtures, and equipment are depreciated on a straight-line basis over the estimated useful lives of the assets, which range from three to seven years. Leasehold improvements are amortized on a straight-line basis over the shorter of the estimated useful lives of the assets or the lease term. Depreciation and amortization is recorded as a separate line item in the consolidated statements of operations and is not allocated to Cost of services, Member relations and marketing, or General and administrative expenses.

Computer software and website development costs that are incurred in the preliminary project and planning stages are expensed as incurred. During development, consulting costs and payroll and payroll-related costs for employees that are directly associated with each project are capitalized. Capitalized software and website development costs are depreciated on a straight-line basis over the estimated useful lives of the assets, which range from three to five years. Replacements and major improvements are capitalized, while maintenance and repairs are charged to expense as incurred.

Business Combinations

The Company records acquisitions using the acquisition method of accounting. All of the assets acquired, liabilities assumed, contractual contingencies, and contingent consideration, when applicable, are recorded at fair value at the acquisition date. The application of the acquisition method of accounting requires management to make significant estimates and assumptions in the determination of the fair value of assets acquired and liabilities assumed in order to allocate purchase price consideration. Deferred revenue at the acquisition date is recorded at fair value based on the estimated cost to provide the related services plus a reasonable profit margin on such costs. These estimates are inherently uncertain. In addition, unanticipated events and circumstances may occur, which may affect the accuracy or validity of such estimates.

Goodwill

Goodwill is recorded when the purchase price for an acquisition exceeds the estimated fair value of the net tangible and identified intangible assets acquired.

The Company tests goodwill for impairment annually on October 1^st at the reporting unit level. If the reporting unit has historically had a significant excess of fair value over book value and based on current operations is expected to continue to do so, the Company’s annual impairment test is performed qualitatively. For all other reporting units, the first step of the goodwill impairment process (“Step 1”) is completed, which involves determining whether the estimated fair value of the reporting unit exceeds the respective book value. In performing Step 1, management compares the carrying amount of the reporting unit to its estimated fair value. If the fair value exceeds the book value, goodwill of that reporting unit is not impaired. The estimated fair value of each reporting unit is calculated using one or both of the following generally accepted valuation techniques: the income approach (discounted cash flows) and the market approach (using market multiples derived from a set of companies with comparable market characteristics). The appropriate methodology is determined by management based on available information at the time of the test. When both approaches are used, the estimated fair values are weighted. In general, the market approach is not weighted more than 50%.

On a quarterly basis, the Company considers whether events or circumstances are present that may lead to the determination that an indicator of impairment exists. These circumstances include, but are not limited to, deterioration in key performance indicators or industry and market conditions.

Factors management considers important that could trigger an interim impairment review include, but are not limited to, the following:

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significant underperformance relative to historical or projected future operating results;

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significant change in the manner of the Company’s use of the acquired asset or the strategy for its overall business;

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significant change in prevailing interest rates;

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significant negative industry or economic trend;

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market capitalization relative to net book value; and/or

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significant negative change in market multiples of the comparable company set.

If, based on events or changing circumstances, the Company determines it is more likely than not that the fair value of a reporting unit does not exceed its carrying value, the Company would be required to test goodwill for impairment.

If the Step 1 result concludes that the fair value does not exceed the book value of the reporting unit, goodwill may be impaired and additional analysis is required (“Step 2”). Step 2 of the goodwill impairment test compares the implied fair value of a reporting unit’s goodwill to its carrying value. The implied fair value of goodwill is derived by performing a hypothetical purchase price allocation for the reporting unit as of the measurement date, by allocating the reporting unit’s estimated fair value to its assets and liabilities including any unrecognized intangible assets. The residual amount from performing this allocation represents the implied fair value of goodwill. To the extent this amount is below the carrying value of goodwill, an impairment loss is recorded.

The process of evaluating the potential impairment of goodwill is highly subjective and requires significant judgment and estimates. CEB’s businesses operate in a number of markets and geographical regions, and the products and services, because of their specialized nature, may not bear close correlation to those of the market-comparable company set. The assumptions utilized in the evaluation of the impairment of goodwill under the income approach include revenue growth rates, cash flows, EBITDA, tax rates, capital expenditures, the weighted average cost of capital (“WACC”) and related discount rate, and expected long-term growth rates (residual growth rate). The assumptions that have the most significant effect on the valuations derived using a discounted cash flows methodology are (1) revenue growth rates, (2) the discount rate, (3) residual growth rates, and (4) foreign currency rates. The assumptions utilized in the market approach include the selection of comparable companies, which are subject to change based on the economic characteristics of the reporting units. Revenue and EBITDA multiples for market comparable companies for the current and future periods are used to estimate the fair value of the reporting unit by applying those multiples to the projected financial information prepared by management.

The cash flows utilized in the income approach are based on the most recent budgets, forecasts, and business plans, as well as various growth rate assumptions for years beyond the current period. Growth rates represent the expected growth rates for the reporting unit considering the industry in which the Company operates and the global economy. Discount rate assumptions are based on an assessment of the risk inherent in the future revenue streams and cash flows and the WACC. The risk adjusted discount rate used represents the estimated WACC for the reporting unit. The discount rate is comprised of (1) a risk free rate of return, (2) an equity risk premium that is based on the rate of return on equity of publicly traded companies with business characteristics comparable to the reporting unit, (3) the current after-tax market rate of return on debt of companies with business characteristics similar to the reporting unit, each weighted by the relative market value percentages of the Company’s equity and debt, and (4) an appropriate company-specific risk premium.

Intangible Assets, Net

Intangible assets are those assets that arise from business combinations consisting of customer relationships, intellectual property, trade names, and software. These assets are amortized on a straight-line basis over initial estimated useful lives of 1 to 20 years.

Recovery of Long-Lived Assets (Excluding Goodwill)

Long-lived assets, including intangible assets, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Such events may include, but may not be limited to, unexpected customer turnover, technological obsolescence of software or intellectual property, or lower than expected operating performance of the products or services supporting these assets. The test for recoverability is made using an estimate of the undiscounted expected future cash flows and, if required, the impairment loss is measured as the amount that the carrying value of the asset exceeds its fair value if the asset is not recoverable.

Fair Value of Financial Instruments

The Company’s financial instruments consist primarily of cash and cash equivalents, accounts receivable, investments held through variable insurance products in a Rabbi Trust for the Company’s deferred compensation plan, available-for-sale securities, accounts payable, forward currency contracts, interest rate swaps, and debt. The carrying value of these financial instruments approximates their fair value. The Company’s financial instruments also include various other investments in private entities, which do not have readily determinable fair values because they are not actively traded.

Revenue Recognition

Revenue is recognized when (1) there is persuasive evidence of an arrangement, (2) the fee is fixed and determinable, (3) services have been rendered and payment has been contractually earned, and (4) collectability is reasonably assured. Certain fees are billed on an installment basis.

When service offerings include multiple deliverables that qualify as separate units of accounting, the Company allocates arrangement consideration at the inception of the contract period to all deliverables based on the relative selling price method in accordance with the selling price hierarchy, which includes vendor specific objective evidence (“VSOE”) if available; third-party evidence (“TPE”) if VSOE is not available; or best estimate of selling price (“BESP”) if neither VSOE nor TPE is available.

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VSOE. The Company determines VSOE based on established pricing and discounting practices for the specific service when sold separately. In determining VSOE, the Company requires that a substantial majority of the selling prices for these services fall within a reasonably narrow pricing range. The Company limits its assessment of VSOE for each element to either the price charged when the same element is sold separately, or the price established by management having the relevant authority to do so for an element not yet sold separately.

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TPE. When VSOE cannot be established, the Company applies judgment with respect to whether a selling price can be established based on TPE, which is determined based on competitor prices for similar offerings when sold separately. Generally, CEB services contain a significant level of differentiation such that the comparable pricing of services with similar functionality cannot be obtained. Furthermore, the Company is unable to reliably determine what similar competitors’ selling prices are for similar offerings on a stand-alone basis. As a result, the Company generally has not been able to establish selling price based on TPE.

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BESP. When unable to establish a selling price using VSOE or TPE, BESP is used. The objective of BESP is to determine the price at which the Company would transact a sale if the product or service were sold on a stand-alone basis. BESP is determined by considering multiple factors including, but not limited to, prices charged for similar offerings, market conditions, competitive landscape, and pricing practices. BESP is the measure used to allocate arrangement consideration for the majority of multiple deliverables.

The CEB segment generates the majority of its revenue from two primary service offerings: executive memberships and professional services. In addition, the CEB segment also earns revenue from the sales of executive education, sponsorship fees earned by Evanta, and services provided to the US government and its agencies by Personnel Decisions Research Institutes, LLC (“PDRI”). Revenue is recognized as follows:

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Executive memberships revenue is primarily recognized on a ratable basis over the contract period, which is typically twelve months in duration. In general, the majority of the deliverables within the Company’s memberships are consistently available throughout the contract period. Revenue recognition begins on the first day of the contract period. The fees receivable and the related deferred revenue are recorded upon the commencement of the contract period or collection of fees, if earlier. In some instances, a membership may include a service that is available only once, or on a limited basis, during the contract period. These services are separated from the remainder of the membership and arrangement consideration is allocated based principally on BESP. The consideration allocated to services available only once or on a limited basis is recognized as revenue upon the earlier of the delivery of the service or the completion of the contract period, provided that all other criteria for recognition have been met. The arrangement consideration allocated to the remainder of the membership services continues to be recognized ratably.

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Professional services revenue in the Human Resources sector is generally recognized ratably from the date services begin, which is primarily after the design of the service outputs, through the completion of the services. Professional services in the Sales sector is generally comprised of multiple element arrangements whereby arrangement consideration is allocated based principally on BESP and revenue for each unit of accounting is generally recognized as services are completed.

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Executive education revenue is recognized as services are completed. The service offering generally includes one or more classroom-based training or presentation events. If more than one delivery date is evident, arrangement consideration is allocated on a pro-rata basis and revenue is recognized on the delivery date of each event.

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Sponsorship fees earned by Evanta are recognized on the date the event occurs. Revenue generated from sponsorship fees is seasonal in nature, with a majority recognized in the second and fourth quarters.

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PDRI’s primary customer is the US government and its agencies. Additionally, PDRI is expanding into the commercial market and is a subcontractor to other companies supporting the US government. Agreements with customers are: fixed firm price (“FFP”), time and material (“T&M”), license, or FFP level of effort. Revenue from FFP projects is recognized based on costs incurred compared to estimated costs at completion, resulting in percentage complete of the total contract value. Revenue on T&M projects is recognized based on total number of hours by labor category and negotiated contract rate plus any additional other direct costs. Revenue for licenses or subscriptions of IT products or platforms is recognized proportionately over the license period. For FFP level of effort projects, revenue is based on negotiated fixed rates of labor or deliverables, not to exceed the total contract FFP value. When customer orders represent multiple element arrangements, consideration is allocated to the units of accounting based on BESP.

The CEB Talent Assessment segment generates the majority of its revenue from the sale of access to its cloud based assessment platforms. Access to the platforms is either sold on a subscription basis or for a set number of assessments. CEB Talent Assessment segment also provides consulting services including fully outsourced assessment services. The CEB Talent Assessment segment allocates arrangement consideration to the appropriate units of accounting based on BESP when sales to customers qualify as multiple element arrangements. Revenue is recognized as follows:

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Revenue from subscription contracts is recognized on a ratable basis over the contract period, which is typically twelve months in duration. Revenue from agreements with a specified number of assessments is recognized upon usage, irrespective of whether the units are billed in advance or arrears.

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Consulting arrangements generally include a measured amount of consulting effort to be performed. Revenue is recognized on a proportional performance basis based upon the level of effort completed through the end of each accounting period.

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Training revenue is recognized upon delivery.

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Outsourced assessment revenue from assessment projects is recognized as services are completed.

Operating Leases

The Company has non-cancelable operating lease agreements for its offices with lease periods expiring between 2017 and 2032. The Company is committed to pay a portion of the related operating expenses and real estate taxes under these lease agreements. The Company recognizes rent expense under operating leases on a straight-line basis over the non-cancelable term of the lease, including free-rent periods and lease escalations. Lease incentives, relating to allowances provided by landlords, are amortized over the term of the lease as a reduction of rent expense. The Company recognizes sublease income on a straight-line basis over the term of the sublease, including free rent periods and escalations, as a reduction of rent expense. Costs associated with acquiring a subtenant, including broker commissions and tenant allowances, are amortized over the sublease term as a reduction of sublease income.

Share-Based Compensation

The Company has several share-based compensation plans. These plans provide for the granting of restricted stock, restricted stock units (“RSUs”), performance share awards (“PSAs”), stock appreciation rights (“SARs”), stock options, deferred stock units, and incentive bonuses to employees, directors, and consultants. Share-based compensation expense is measured at the grant date of the awards based on their fair value and is recognized on a straight-line basis over the vesting periods, net of an estimated forfeiture rate.

The grant date fair value of RSUs and PSAs, which are not entitled to receive dividends until vested, is measured by reducing the share price at that date by the present value of the dividends expected to be paid during the requisite vesting period. Determining the fair value of share-based awards is judgmental in nature and involves the use of estimates and assumptions, including the term of the share-based awards, risk-free interest rates over the vesting period, expected dividend rates, the price volatility of the Company’s stock, and estimated forfeiture rates of the awards. Forfeiture rate estimates are based on assumptions the Company believes to be reasonable. Actual future results may differ from those estimates.

Advertising Expense

The costs of designing and preparing advertising material are recognized throughout the production process. Communication costs, including magazine and newspaper space, radio time, and distribution are recognized when the communication takes place. Advertising expense was $1.7 million, $1.7 million, and $1.3 million in 2016, 2015, and 2014, respectively.

Acquisition Related Costs

Acquisition related costs primarily represent transaction and severance costs incurred in connection with acquired companies.

Income Taxes

Deferred tax assets and liabilities are determined based on temporary differences between the financial reporting basis and the tax basis of assets and liabilities. Deferred tax assets are also recognized for tax net operating loss carryforwards. These deferred tax assets and liabilities are measured using the enacted tax rates and laws that will be in effect when such amounts are expected to reverse or be utilized. A valuation allowance is provided to reduce such deferred tax assets to amounts more likely than not to be ultimately realized.

Income tax benefits are recognized when, based on the technical merits of a tax position, the Company believes that if a dispute arose with the taxing authority and were taken to a court of last resort, it is more likely than not (i.e., a probability of greater than 50%) that the tax position would be sustained as filed. If a position is determined to be more likely than not of being sustained, the Company recognizes the largest amount of tax benefit that is greater than 50% likely of being realized upon ultimate settlement with the taxing authority. The Company classifies interest and penalties related to the unrecognized tax benefits in its income tax provision.

Concentration of Credit Risk and Sources of Revenue

Financial instruments, which potentially expose the Company to concentration of credit risk, consist primarily of accounts receivable and cash and cash equivalents. Concentration of credit risk with respect to accounts receivable is limited due to the large number of members and customers and their dispersion across many different industries and countries worldwide. However, the Company may be exposed to a declining customer base in periods of unforeseen market downturns, severe competition, or international developments. The Company performs periodic evaluations of the customer base and related receivables and establishes allowances for potential credit losses.

The Company’s international operations subject it to risks related to currency exchange fluctuations. Prices for the CEB segment products and services are primarily denominated in US dollar (“USD”); however, the Company offers foreign currency billings to certain members outside the United States. A substantial portion of the costs associated with the CEB segment’s operations located outside the United States are denominated in local currencies. Prices for the CEB Talent Assessment segment are denominated in the currency of the country of sale and are principally denominated in British pound sterling (“GBP”), Euro, USD, and Australian dollar. Most of the costs associated with the CEB Talent Assessment segment’s operations are based in the United Kingdom (“UK”) and are denominated in GBP.

The Company uses forward contracts, designated as cash flow hedging instruments, to protect against foreign currency exchange rate risks. A forward contract locks in a current foreign currency exchange rate at which the foreign currency transaction will occur at the future date. The maximum length of time over which the Company hedges its exposure to the variability in future cash flows is 12 months.

The Company maintains a portfolio of cash and cash equivalents, which is designed for safety of principal and liquidity. The Company performs periodic evaluations of the relative credit ratings related to the financial institutions holding the Company’s cash and cash equivalents.

(Loss) earnings per Share

Basic (loss) earnings per share is computed by dividing net (loss) income by the number of weighted average common shares outstanding during the period. Diluted (loss) earnings per share is computed by dividing net (loss) income by the number of weighted average common shares outstanding during the period increased by the dilutive effect of potential common shares outstanding during the period. The number of potential common shares outstanding has been determined in accordance with the treasury stock method to the extent they are dilutive. Common share equivalents consist of common shares issuable upon the exercise of outstanding share-based compensation awards. A reconciliation of basic to diluted weighted average common shares outstanding is as follows (in thousands):

	Year Ended December 31,
	2016		2015		2014
Basic weighted average shares outstanding		32,087		33,367		33,666
Effect of dilutive shares outstanding		—		305		373
Diluted weighted average shares outstanding		32,087		33,672		34,039

In 2016, 0.2 million shares related to share-based compensation awards were excluded from the calculation of the effect of dilutive shares outstanding shown above because their impact would be anti-dilutive.