BASIS OF PRESENTATION AND ORGANIZATION

The accompanying unaudited Condensed Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”), with intercompany transactions between consolidated subsidiaries eliminated. In accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X as issued by the Securities and Exchange Commission (the “SEC”), these Condensed Consolidated Financial Statements do not include all of the information and disclosures required by GAAP for complete financial statements. Readers of this quarterly report on Form 10-Q (“Quarterly Report”) should refer to The Howard Hughes Corporation’s (“HHC” or the “Company”) audited Consolidated Financial Statements, which are included in the Company’s annual report on Form 10-K for the fiscal year ended December 31, 2017, filed with the SEC on February 26, 2018 (the "Annual Report"). Approximately $103.2 million in restricted cash was reclassified from Prepaid expenses and other assets, net to Restricted cash on the Condensed Consolidated Balance Sheets at December 31, 2017 to conform to the 2018 presentation as a result of the adoption of Accounting Standards Update ("ASU") 2016-18, Statement of Cash Flows - Restricted Cash. In the opinion of management, all normal recurring adjustments necessary for a fair presentation of the financial position, results of operations, comprehensive income, cash flows and equity for the interim periods have been included. The results for the three and nine months ended September 30, 2018 are not necessarily indicative of the results that may be expected for the year ending December 31, 2018 and future fiscal years.

Management has evaluated for disclosure or recognition all material events occurring subsequent to the date of the Condensed Consolidated Financial Statements up to the date and time this Quarterly Report on Form 10-Q was filed.

Impact of new accounting standard related to Revenue

In May 2014, the Financial Accounting Standards Board (“FASB”) issued ASU 2014-09, Revenues from Contracts with Customers (Topic 606). The standard’s core principle is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the Company expects to be entitled in exchange for those goods or services. HHC adopted Topic 606 and all its related amendments (the “New Revenue Standard”) as of January 1, 2018 (the “Adoption Date”) using the modified retrospective transition method. Accordingly, prior period amounts presented have not been adjusted.

HHC recorded a cumulative effect adjustment of $69.7 million, net of taxes of $19.6 million, to increase Accumulated deficit as of the Adoption Date due to the impact of adopting Topic 606. As discussed in the Annual Report, Condominium rights and unit sales revenues were previously required to be recognized under the percentage of completion method. Under the new guidance, revenue and cost of sales for condominium units sold are not recognized until the construction is complete, the sale closes and the title to the property has transferred to the buyer (point in time). Additionally, certain real estate selling costs, such as the costs related to the Company's condominium model units, are either expensed immediately or capitalized as property and equipment and depreciated over their estimated useful life. The cumulative effect adjustments as of the Adoption Date consist of:


•	a decrease to Condominium receivables of $154.2 million,


•	an increase to Buildings and equipment, net, of $3.4 million,


•	an increase to Developments of $150.8 million,


•	an increase to Prepaid expenses and other assets, net of $5.6 million,


•	an increase to Accounts payable and accrued expenses of $95.0 million,


•	a decrease to Deferred tax liabilities of $19.6 million, and


•	an increase to Accumulated deficit of $69.7 million, net of taxes of $19.6 million.

The following Balance Sheet line items were affected as of September 30, 2018, as a result of HHC's adoption of the New Revenue Standard:



	September 30, 2018
Condensed Consolidated Balance Sheets (in thousands)	Recognition Under Previous Guidance			Impact of Adoption of ASC Topic 606			Recognition Under ASC Topic 606
Buildings and equipment, net	$	2,150,391		$	1,109		$	2,151,500
Developments	1,390,203			435,644			1,825,847
Deferred expenses, net	87,095			8,716			95,811
Prepaid expenses and other assets, net	757,512			(471,318		)	286,194
Deferred tax liabilities	187,806			(39,036		)	148,770
Accounts payable and accrued expenses	562,428			143,436			705,864
Accumulated deficit	(27,354		)	(130,248		)	(157,602		)

For the three and nine months ended September 30, 2018, the following Condensed Consolidated Statements of Operations line items were affected as a result of HHC's adoption of the New Revenue Standard:



	Three Months Ended September 30, 2018							Nine Months Ended September 30, 2018
Condensed Consolidated Statements of Operations (in thousands)	Recognition Under Previous Guidance		Impact of Adoption of ASC Topic 606			Recognition Under ASC Topic 606		Recognition Under Previous Guidance		Impact of Adoption of ASC Topic 606			Recognition Under ASC Topic 606
Condominium rights and unit sales	$	51,823	$	(43,778	)	$	8,045	$	422,015	$	(382,248	)	$	39,767
Condominium rights and unit cost of sales	43,916		(37,748		)	6,168		346,391		(304,678		)	41,713
Depreciation and amortization	30,752		371			31,123		86,059		2,339			88,398
Operating income before other items	52,424		(6,402		)	46,022		119,909		(79,909		)	40,000
Provision for income taxes	9,114		(1,627		)	7,487		25,022		(19,394		)	5,628
Net income	28,622		(4,775		)	23,847		80,317		(60,515		)	19,802
Net income attributable to noncontrolling interests	28,140		(4,775		)	23,365		80,266		(60,515		)	19,751

For the three and nine months ended September 30, 2018, the following Condensed Consolidated Statements of Comprehensive Income line items were affected as a result of HHC's adoption of the New Revenue Standard:



	Three Months Ended September 30, 2018							Nine Months Ended September 30, 2018
Condensed Consolidated Statements of Comprehensive Income (in thousands)	Recognition Under Previous Guidance		Impact of Adoption of ASC Topic 606			Recognition Under ASC Topic 606		Recognition Under Previous Guidance		Impact of Adoption of ASC Topic 606			Recognition Under ASC Topic 606
Net income	$	28,622	$	(4,775	)	$	23,847	$	80,317	$	(60,515	)	$	19,802
Comprehensive income	30,557		(4,775		)	25,782		91,732		(60,515		)	31,217
Comprehensive income attributable to common stockholders	30,075		(4,775		)	25,300		91,681		(60,515		)	31,166

The following Condensed Consolidated Statements of Cash Flows line items were affected as of September 30, 2018, as a result of HHC's adoption of the New Revenue Standard:



	Nine Months Ended September 30, 2018
Condensed Consolidated Statements of Cash Flows (in thousands)	Recognition Under Previous Guidance			Impact of Adoption of ASC Topic 606			Recognition Under ASC Topic 606
Net income	$	80,317		$	(60,515	)	$	19,802
Depreciation and amortization	86,059			2,339			88,398
Deferred income taxes	24,015			(19,394		)	4,621
Condominium rights and unit cost of sales	346,391			(304,678		)	41,713
Percentage of completion revenue recognition from sale of condominium rights and unit sales	(382,248		)	382,248			—

See Note 2 - Accounting Policies and Pronouncements for further discussion of accounting policies impacted by the Company's adoption of the New Revenue Standard and disclosures required by the New Revenue Standard.