Significant Accounting Policies

Principles of Consolidation

The Consolidated Financial Statements include the accounts of Acuity Brands and its wholly-owned subsidiaries after elimination of significant intercompany transactions and accounts.

Revenue Recognition

The Company records revenue when the following criteria are met: persuasive evidence of an arrangement exists, delivery has occurred, the Company’s price to the customer is fixed and determinable, and collectability is reasonably assured. Delivery is not considered to have occurred until the customer assumes the risks and rewards of ownership. Customers take delivery at the time of shipment for terms designated free on board shipping point. For sales designated free on board destination, customers take delivery when the product is delivered to the customer’s delivery site. Provisions for certain rebates, sales incentives, product returns, and discounts to customers are recorded in the same period the related revenue is recorded. The Company also maintains one-time or on-going marketing and trade-promotion programs with certain customers that require the Company to estimate and accrue the expected costs of such programs. These arrangements include cooperative marketing programs, merchandising of the Company’s products, introductory marketing funds for new products, and other trade-promotion activities conducted by the customer. Costs associated with these programs are reflected within the Company’s Consolidated Statements of Comprehensive Income in accordance with the Accounting Standards Codification (“ASC”) Topic 605, Revenue Recognition (“ASC 605”), which in most instances requires such costs be recorded as a reduction of revenue.

The Company's standard terms and conditions of sale allow returns of certain products within four months of the date of shipment. The Company also provides for limited product return rights to certain distributors and other customers, primarily for slow moving or damaged items subject to certain defined criteria. The limited product return rights generally allow customers to return resalable products purchased within a specified time period and subject to certain limitations, including, at times, when accompanied by a replacement order of equal or greater value. At the time revenue is recognized, the Company records a provision for the estimated amount of future returns primarily based on historical experience, specific notification of pending returns, or based on contractual terms with the respective customers. Although historical product returns generally have been within expectations, there can be no assurance that future product returns will not exceed historical amounts. A significant increase in product returns could have a material adverse impact on the Company's operating results in future periods.

Revenue is earned on services and the sale of products. Revenue is recognized for the sale of products when the above criteria are met and for services rendered in the period of performance.

Revenue Recognition for Arrangements with Multiple Deliverables

A small portion of the Company's revenues are derived from the combination of any or all of: (i) the sale and license of its products, (ii) fees associated with training, installation, and technical support services, and (iii) monitoring and lighting control services. Certain agreements, particularly related to lighting controls systems, represent multiple-element arrangements that include tangible products that contain software that is essential to the functionality of the systems and undelivered elements that primarily relate to installation, monitoring, and lighting control services. The undelivered elements associated with installation, monitoring, and lighting control services are reviewed and analyzed to determine separability in relation to the delivered elements and appropriate pricing treatment based on (a) vendor-specific objective evidence, (b) third-party evidence, or (c) management estimates. If deemed separate units of accounting, the revenue and associated cost of sales related to the delivered elements are recognized at the time of delivery, while those related to the undelivered elements are recognized appropriately based on the period of performance. If the separation criterion for the undelivered elements is not met because the undelivered elements are essential to the functionality of the lighting controls systems, all revenue and cost of sales attributable to the contract are deferred at the time of sale and are both generally recognized on a straight-line basis over the respective contract periods.

Use of Estimates

The preparation of financial statements and related disclosures in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expense during the reporting period. Actual results could differ from those estimates.

Cash and Cash Equivalents

Cash in excess of daily requirements is invested in time deposits and marketable securities and is included in the accompanying balance sheets at fair value. Acuity Brands considers time deposits and marketable securities with an original maturity of three months or less when purchased to be cash equivalents.

Accounts Receivable

The Company records accounts receivable at net realizable value. This value includes an allowance for estimated uncollectible accounts to reflect losses anticipated on accounts receivable balances. The allowance is based on historical write-offs, an analysis of past due accounts based on the contractual terms of the receivables, and economic status of customers, if known. Management believes that the allowance is sufficient to cover uncollectible amounts; however, there can be no assurance that unanticipated future business conditions of customers will not have a negative impact on the Company’s results of operations.

Concentrations of Credit Risk

Concentrations of credit risk with respect to receivables, which are typically unsecured, are generally limited due to the wide variety of customers and markets using the Company’s lighting solutions as well as their dispersion across many different geographic areas. Receivables from The Home Depot were approximately $53.3 and $53.7 at August 31, 2014 and 2013, respectively. No other single customer accounted for more than 10% of consolidated receivables at August 31, 2014 or 2013. Additionally, net sales to The Home Depot accounted for approximately 12% of net sales of the Company in fiscal 2014, 13% in fiscal 2013, and 10% in fiscal 2012.

Reclassifications

Certain prior-period amounts have been reclassified to conform to the current year presentation.

Subsequent Events

The Company has evaluated subsequent events for recognition and disclosure for occurrences and transactions after the date of the consolidated financial statements as of August 31, 2014.

Inventories

Inventories include materials, direct labor, in-bound freight, and related manufacturing overhead, are stated at the lower of cost (on a first-in, first-out or average cost basis) or market, and consist of the following:



	August 31,
	2014			2013
Raw materials, supplies, and work in process⁽¹⁾	$	125.7		$	122.6
Finished goods	97.6			90.9
	223.3			213.5
Less: Reserves	(11.3		)	(10.5		)
Total Inventory	$	212.0		$	203.0

_______________________________________


⁽¹⁾	Due to the immaterial amount of estimated work in process and the short lead times for the conversion of raw materials to finished goods, the Company does not believe the segregation of raw materials and work in process to be meaningful information.

Management reviews inventory quantities on hand and records a provision for excess or obsolete inventory primarily based on estimated future demand and current market conditions. A significant change in customer demand or market conditions could render certain inventory obsolete and thus could have a material adverse impact on the Company’s operating results in the period the change occurs.

Assets Held for Sale

The Company classifies assets as held for sale upon the development of a plan for disposal and in accordance with applicable U.S. GAAP and ceases the depreciation and amortization of the assets at that date. The Company is actively marketing the properties classified as held for sale. As of August 31, 2014, the carrying value of the properties held for sale was $3.7, which is included in Prepayments and other current assets on the Consolidated Balance Sheets.

Goodwill and Other Intangibles

Changes in the carrying amount of goodwill during the year are summarized as follows:



Goodwill:
Balance as of August 31, 2013	$	568.2
Adjustments for acquired businesses	1.4
Currency translation adjustments	(0.2		)
Balance as of August 31, 2014	$	569.4

The current year increase in the gross carrying amount for goodwill was due primarily to the finalization of the acquisition accounting adjustments for Adura and eldoLED partially offset by the impact of foreign currency changes during the period.

Summarized information for the Company’s acquired intangible assets is as follows:



	August 31,
	2014					2013
	Gross Carrying Amount		Accumulated Amortization			Gross Carrying Amount		Accumulated Amortization
Definite-lived intangible assets:
Patents and patented technology	$	69.2	$	(26.4	)	$	71.3	$	(22.2	)
Trademarks and trade names	25.4		(8.6		)	25.4		(6.9		)
Distribution network	61.8		(29.7		)	61.8		(27.4		)
Customer relationships	55.2		(16.3		)	55.2		(13.9		)
Other	5.3		(4.3		)	5.5		(3.7		)
Total	$	216.9	$	(85.3	)	$	219.2	$	(74.1	)
Indefinite-lived trade names	$	100.0				$	100.0

Through multiple acquisitions, the Company acquired intangible assets consisting primarily of trademarks and trade names associated with specific products with finite lives, definite-lived distribution networks, patented technology, non-compete agreements, and customer relationships, which are amortized over their estimated useful lives. Indefinite-lived intangible assets consist of trade names that are expected to generate cash flows indefinitely. Significant estimates and assumptions were used to determine the intial fair value of these acquired intangible assets, including estimated future net sales, customer attrition rates, royalty rates, and discount rates. The current year decreases in the gross carrying amounts for the acquired intangible assets were due primarily to recording the final values of intangible assets associated with the acquisition of Adura (refer to the Acquisitions footnote).

The Company recorded amortization expense of $11.2, $10.9, and $11.2 related to intangible assets with finite lives during fiscal 2014, 2013, and 2012, respectively. Amortization expense is generally recorded on a straight-line basis and is expected to be approximately $11.1 in fiscal 2015, $10.5 in fiscal 2016, $10.2 in fiscal 2017, $10.2 in fiscal 2018, and $10.2 in fiscal 2019.

The Company tests goodwill and indefinite-lived intangible assets for impairment on an annual basis or more frequently as facts and circumstances change, as required by ASC Topic 350, Intangibles — Goodwill and Other (“ASC 350”). The goodwill impairment test has three steps: a qualitative review and a two-step quantitative method. The preliminary step (“Step 0”) allows for a qualitative analysis to determine the likelihood of impairment. If the qualitative review results in a more likely than not probability of impairment, the first quantitative step is required. The first step identifies potential impairments by comparing the fair value of a reporting unit with its carrying value, including goodwill. The fair values can be determined based on a combination of valuation techniques including the expected present value of future cash flows, a market multiple approach, and a comparable transaction approach. If the fair value of a reporting unit exceeds the carrying value, goodwill is not considered impaired and the second step is not necessary. If the carrying value of a reporting unit exceeds the fair value, the second step calculates the possible impairment loss by comparing the implied fair value of goodwill with the carrying value. If the implied fair value of the goodwill is less than the carrying value, an impairment charge is recorded. In fiscal 2014, a quantitative fair value analysis, based on discounted future cash flows, was used to determine the likelihood of goodwill impairment for the Company’s one reporting unit. The analysis for goodwill did not result in an impairment charge during fiscal 2014, 2013, or 2012.

The impairment test for indefinite-lived trade names consists of comparing the fair value of the asset with its carrying value. The Company estimates the fair value of indefinite-lived trade names using a fair value model based on discounted future cash flows. If the carrying amount exceeds the estimated fair value, an impairment loss would be recorded in the amount of the excess. Significant assumptions, including estimated future net sales, royalty rates, and discount rates, are used in the determination of estimated fair value for indefinite-lived trade names. None of the analyses for the indefinite-lived trade names resulted in an impairment charge during fiscal 2014, 2013, or 2012.

Other Long-Term Assets

Other long-term assets consist of the following:



	August 31,
	2014		2013
Deferred contract costs	$	15.0	$	13.5
Capitalized software costs⁽¹⁾	2.3		2.7
Other⁽²⁾	7.6		11.2
Total	$	24.9	$	27.4

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⁽¹⁾	The Company recorded amortization expense related to capitalized software costs of $0.4, $0.9, and $1.1 in fiscal 2014, 2013, and 2012, respectively.

⁽²⁾

Other - Amount primarily includes deferred debt issuance costs and company-owned life insurance investments. The Company maintains life insurance policies on 78 current and former employees primarily to satisfy obligations under certain deferred compensation plans. These company-owned life insurance policies are presented net of loans that are secured by these policies. This program is frozen and no new policies were issued in the three-year period ended August 31, 2014.

Other Long-Term Liabilities

Other long-term liabilities consist of the following:



	August 31,
	2014		2013
Deferred compensation and postretirement benefits other than pensions⁽¹⁾	$	32.6	$	31.9
Acquisition-related liabilities⁽²⁾	5.3		9.0
Uncertain tax position liabilities, including interest⁽³⁾	3.5		5.7
Other⁽⁴⁾	8.8		8.3
Total	$	50.2	$	54.9

_______________________________________

⁽¹⁾

Deferred compensation and postretirement benefits other than pensions — The Company maintains several non-qualified retirement plans for the benefit of eligible employees, primarily deferred compensation plans. The deferred compensation plans provide for elective deferrals of an eligible employee’s compensation and, in some cases, matching contributions by the Company. In addition, one plan provides for an automatic contribution by the Company of 3% of an eligible employee’s compensation. The Company maintains certain long-term investments that offset a portion of the deferred compensation liability. The Company maintains life insurance policies on certain current and former officers and other key employees as a means of satisfying a portion of these obligations.


⁽²⁾	Acquisition-related liabilities - Amounts represent contingent payments and other obligations, including holdback liabilities, related to recent acquisitions.


⁽³⁾	See the Income Taxes footnote for more information.


⁽⁴⁾	Other - Amount primarily includes deferred revenue and deferred rent.

Shipping and Handling Fees and Costs

The Company includes shipping and handling fees billed to customers in Net Sales. Shipping and handling costs associated with inbound freight and freight between manufacturing facilities and distribution centers are generally recorded in Cost of Products Sold. Other shipping and handling costs are included in Selling, Distribution, and Administrative Expenses and totaled $100.9, $86.4, and $81.5 in fiscal 2014, 2013, and 2012, respectively.

Share-Based Compensation

The Company recognizes compensation cost relating to share-based payment transactions in the financial statements based on the estimated fair value of the equity or liability instrument issued. The Company accounts for stock options, restricted shares, and share units representing certain deferrals into the Director Deferred Compensation Plan or the Supplemental Deferred Savings Plan (both of which are discussed further in the Share-Based Payments footnote) based on the grant-date fair value estimated under the current provisions of ASC Topic 718, Compensation — Stock Compensation (“ASC 718”).

Share-based expense includes expense related to restricted stock and options issued, as well as share units deferred into either the Director Deferred Compensation Plan. The Company recorded $17.7, $16.5, and $15.9 of share-based expense for the years ending August 31, 2014, 2013, and 2012, respectively. The total income tax benefit recognized for share-based compensation arrangements was $6.0, $5.6, and $5.6 for the years ended August 31, 2014, 2013, and 2012, respectively. The Company accounts for any awards with graded vesting on a straight-line basis. Additionally, forfeitures of share-based awards are estimated based on historical experience at the time of grant and are revised in subsequent periods if actual forfeitures differ from initial estimates. The Company did not capitalize any expense related to share-based payments and has recorded share-based expense, net of estimated forfeitures, in Selling, Distribution, and Administrative Expenses.

Benefits of tax deductions in excess of recognized share-based compensation cost are reported as a financing cash

flow, rather than as an operating cash flow, in the Company’s Statements of Cash Flows and amounted to $10.4, $8.6, and $4.9 for fiscal 2014, 2013, and 2012, respectively.

See the Share-Based Payments footnote for more information.

Depreciation

For financial reporting purposes, depreciation is determined principally on a straight-line basis using estimated useful lives of plant and equipment (10 to 40 years for buildings and related improvements and 3 to 15 years for machinery and equipment), while accelerated depreciation methods are used for income tax purposes. Leasehold improvements are amortized over the shorter of the life of the lease or the estimated useful life of the improvement. Depreciation expense amounted to $31.8, $29.0, and $27.5 during fiscal 2014, 2013, and 2012, respectively.

Research and Development

Research and development (“R&D”) expense, which is expensed as incurred, consists of compensation, payroll taxes, employee benefits, materials, supplies, and other administrative costs, but does not include all new product development costs, and is included in Selling, Distribution, and Administrative Expenses in the Company’s Consolidated Statements of Comprehensive Income. R&D expense amounted to $35.3, $32.7, and $34.7 during fiscal 2014, 2013, and 2012, respectively.

Advertising

Advertising costs are expensed as incurred and are included within Selling, Distribution, and Administrative Expenses in the Company’s Consolidated Statements of Comprehensive Income. These costs totaled $13.3, $12.1, and $12.6 during fiscal 2014, 2013, and 2012, respectively.

Service Arrangements with Customers

The Company maintains a service program with one of its retail customers that affords the Company certain in-store benefits, including lighting display maintenance. Costs associated with this program totaled $6.1, $5.7, and $5.7 in fiscal 2014, 2013, and 2012, respectively. These costs have been included within Selling, Distribution, and Administrative Expenses in the Company’s Consolidated Statements of Comprehensive Income.

Interest Expense, Net

Interest expense, net, is comprised primarily of interest expense on long-term debt, revolving credit facility borrowings, and loans collateralized by assets related to a company-owned life insurance program, partially offset by interest income on cash and cash equivalents.

The following table summarizes the components of interest expense, net:



	Years Ended August 31,
	2014			2013			2012
Interest expense	$	32.6		$	31.9		$	31.3
Interest income	(0.5		)	(0.7		)	(0.6		)
Interest expense, net	$	32.1		$	31.2		$	30.7

Foreign Currency Translation

The functional currency for the foreign operations of the Company is the local currency. The translation of foreign currencies into U.S. dollars is performed for balance sheet accounts using exchange rates in effect at the balance sheet dates and for revenue and expense accounts using a weighted average exchange rate each month during the year. The gains or losses resulting from the balance sheet translation are included in Foreign currency translation adjustments in the Consolidated Statements of Comprehensive Income and are excluded from net income.

Miscellaneous Expense (Income), Net

Miscellaneous expense (income), net, is composed primarily of gains or losses on foreign currency items and other non-operating items. Gains or losses relating to foreign currency items consisted of expense of $1.5 in fiscal 2014, expense of $0.2 in fiscal 2013, and income of $1.2 in fiscal 2012.

Income Taxes

The Company is taxed at regular corporate rates after adjusting income reported for financial statement purposes for certain items that are treated differently for income tax purposes. Deferred income tax expenses or benefits result from changes during the year in cumulative temporary differences between the tax basis and book basis of assets and liabilities.

Comprehensive Income

Comprehensive income represents a measure of all changes in equity that result from recognized transactions and other economic events other than transactions with owners in their capacity as owners. Other comprehensive income for the Company includes foreign currency translation and pension adjustments.

The following table presents the changes in each component of Accumulated Other Comprehensive Income/Loss Items, net of tax.



	Foreign Currency Items			Defined Benefit Pension Plans			Accumulated Other Comprehensive Loss Items
Balance at August 31, 2013	$	(18.8	)	$	(43.8	)	$	(62.6	)
Other Comprehensive Income/(Expense) before reclassifications	0.7			(12.6		)	(11.9		)
Amounts reclassified from accumulated other comprehensive income	—			2.6			2.6
Net current-period Other Comprehensive Income/(Expense)	0.7			(10.0		)	(9.3		)
Balance at August 31, 2014	$	(18.1	)	$	(53.8	)	$	(71.9	)

The following table presents the tax (expense)/benefit allocated to each component of Other Comprehensive Income (Expense).



	Years Ended August 31,
	2014									2013									2012
	Before Tax Amount			Tax (Expense) or Benefit			Net of Tax Amount			Before Tax Amount			Tax (Expense) or Benefit			Net of Tax Amount			Before Tax Amount			Tax (Expense) or Benefit			Net of Tax Amount
Foreign Currency Translation Adjustments	$	0.7		$	—		$	0.7		$	(1.9	)	$	—		$	(1.9	)	$	(8.2	)	$	—		$	(8.2	)
Defined Benefit Pension Plans:
Prior service cost from plan amendment during period	—			—			—			(5.5		)	2.2			(3.3		)	—			—			—
Actuarial gains (losses)	(18.2		)	5.6			(12.6		)	34.5			(11.7		)	22.8			(38.3		)	12.9			(25.4		)
Amortization of defined benefit pension items:
Prior service cost ⁽¹⁾	0.8			(0.3		)	0.5			0.7			(0.3		)	0.4			0.1			—			0.1
Actuarial losses ⁽¹⁾	3.1			(1.0		)	2.1			6.2			(2.1		)	4.1			4.1			(1.5		)	2.6
Total Defined Benefit Plans, net	(14.3		)	4.3			(10.0		)	35.9			(11.9		)	24.0			(34.1		)	11.4			(22.7		)
Other Comprehensive Income/(Expense)	$	(13.6	)	$	4.3		$	(9.3	)	$	34.0		$	(11.9	)	$	22.1		$	(42.3	)	$	11.4		$	(30.9	)

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⁽¹⁾	The before tax amount of these accumulated other comprehensive income components is included in net periodic pension cost. See the Pension and Defined Contribution Plans footnote for additional details.