BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of presentation

Patheon consists of three reportable segments: Drug Product Services ("DPS"), Pharmaceutical Development Services ("PDS"), and Drug Substance Services ("DSS"). Drug Product Services provides manufacturing and packaging for approved prescription, over-the-counter, and nutritional products. Pharmaceutical Development Services provides a wide spectrum of advanced formulation, production, and technical services from the early stages of a product's development to regulatory approval and beyond, as well as for new formulations of approved products for life cycle extension. Drug Substance Services provides development and manufacturing for the biologically active component of a pharmaceutical product from early development through commercial production.

The accompanying unaudited consolidated financial statements have been prepared by the Company in accordance with accounting principles generally accepted in the United States ("U.S. GAAP"). Operating results for the three and six months ended April 30, 2017 are not necessarily indicative of the results that may be expected for the fiscal year ending October 31, 2017 ("fiscal 2017"). These consolidated financial statements do not include all the information and footnotes required by U.S. GAAP for annual financial statements and therefore should be read in conjunction with the audited consolidated financial statements and notes for the fiscal year ended October 31, 2016 ("fiscal 2016").

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

The preparation of the consolidated financial statements 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 consolidated financial statements; and the reported amounts of revenue and expenses in the reporting period. Management believes that the estimates and assumptions used in preparing its consolidated financial statements are reasonable and prudent; however, actual results could differ from those estimates.

Changes in significant accounting policies

As a result of early adopting Accounting Standards Update 2016-09, 'Improvements to Employee Share-Based Payment Accounting', the Company is electing to account for forfeitures on stock based compensation awards as they occur. No adjustment is required to comply with the early adoption. The Company was previously not estimating forfeitures on stock based compensation awards since the impact of potential forfeiture was immaterial to the consolidated financial statements.

Segment information

U.S. GAAP requires segmentation based on an entity’s internal organization and reporting of revenue and operating income (loss) based upon internal accounting methods commonly referred to as the “management approach.” Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker (“CODM”), or decision making group, in deciding how to allocate resources and in assessing performance. The Company’s CODM is its Chief Executive Officer.

The Company’s four operating segments are: North America Drug Product Services, or North America DPS, Europe Drug Product Services, or Europe DPS, Pharmaceutical Development Services, or PDS and Drug Substance Services, or DSS. The North America DPS and Europe DPS operating segments meet the aggregation criteria to be presented as one reportable segment referred to as DPS. As a result, the Company has determined it has three reportable segments: DPS, PDS, and DSS. Corporate is not an individually reportable segment because the quantitative thresholds have not been met and as such has been reported in Other.

Recently adopted accounting pronouncements



Accounting Standards Update ("ASU")	Description	Date Adopted
Improvements to Employee Share-Based Payment Accounting (ASU 2016-09)	This update simplifies several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The Company early-adopted ASU 2016-09 during the second quarter of fiscal 2017, which had no effect on the Company's financial statements.	February 1, 2017
Simplifying the Accounting for Measurement-Period Adjustment (ASU 2015-16)	This update eliminated the requirement to an acquirer in a business combination to retrospectively adjust provisional amounts recognized at the acquisition date with a corresponding adjustment to goodwill. Instead, the update requires that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. The impact will be dependent on future transactions.	November 1, 2016
Simplifying the Presentation of Debt Issuance Costs (ASU 2015-03)	The pronouncement requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of the debt liability, consistent with that of debt discounts. The pronouncement is being applied retrospectively and the Company's October 31, 2016 balance sheet has been adjusted. The April 30, 2017 and October 31, 2016 balance sheets were adjusted to decrease the deferred financing cost asset and decrease the long term debt liability by $45.2 million and $50.3 million, respectively.	November 1, 2016

Recently issued accounting pronouncements



Accounting Standards Update ("ASU")	Description	Expected Impact	Effective Date
Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost (ASU 2017-07)	This update requires that an employer disaggregate the service cost component from the other components of net periodic benefit cost. In addition, only the service cost component will be eligible for capitalization. The amendment is applied retrospectively with earlier application permitted.	We are assessing the impact to the individual line items to the Statements of Operations. The Company does not expect there to be a material impact to net income.	November 1, 2018
Simplifying the Test for Goodwill Impairment (ASU 2017-04)	This update simplified the subsequent measurement of goodwill by eliminating Step 2 of the goodwill impairment test. Instead, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. The amendment also eliminated the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, if it fails that qualitative test, to perform Step 2 of the goodwill impairment test. The amendment is applied prospectively with earlier application permitted.	We do not expect to have a material impact on the Company’s financial statements.	November 1, 2020
Clarifying the Definition of a Business (ASU 2017-01)	This update narrows the definition of outputs and aligns it with how outputs are described in Topic 606. The amendment also provides a more robust framework to use in determining when a set of assets and activities is a business. The amendment is applied prospectively with earlier application permitted.	The impact on the consolidated financial statements from the adoption of this guidance is dependent on future business combinations.	November 1, 2018
Revenue from Contracts with Customers and related standards (ASU's 2014-09, 2016-08, 2016-10, 2016-12, 2016-20)	This update supersedes the existing revenue recognition guidance and provides a new framework for recognizing revenue. These updates identified practical expedients and clarified various aspects of the new revenue recognition standard outlined in Accounting Standards Update 2014-09. This standard may be adopted using either a retrospective or modified retrospective method. Early adoption is permitted.	We are currently in the process of evaluating the impact of this standard. It is still too early in our process to determine the magnitude of the potential impact. However, based on our preliminary assessment, we believe the timing of revenue recognition for commercial and development contracts may differ from our current revenue recognition policies. The Company is determining the magnitude of this potential change. We plan to adopt the standard on November 1, 2018, and we have not yet selected a transition method.	November 1, 2018

From time to time, new accounting pronouncements are issued by the FASB or other standard setting bodies that are adopted by the Company as of the specified effective date or, in some cases where early adoption is permitted, in advance of the specified effective date. The Company has assessed the recently issued standards that are not yet effective and, unless otherwise discussed above or in our audited consolidated financial statements and notes for fiscal 2016, believes these standards will not have a material impact on the Company’s results of operations, cash flows, or financial position. A more detailed listing of recently issued accounting pronouncements are included in our audited consolidated financial statements and notes for fiscal 2016.