Nature of Business and Significant Accounting Policies

FLIR Systems, Inc. (the "Company") is a world leader in sensor systems that enhance perception and awareness. The Company was founded in 1978 and has since become a premier designer, manufacturer, and marketer of thermal imaging and other sensing products and systems. The Company’s advanced sensors and integrated sensor systems enable the gathering and analysis of critical information through a wide variety of applications in commercial, industrial, and government markets worldwide.

The Company’s goal is to both enable its customers to benefit from the valuable information produced by advanced sensing technologies and to deliver sustained superior financial performance for its shareholders. The Company creates value for its customers by providing advanced surveillance and tactical defense capabilities, improving personal and public safety and security, facilitating air, ground, and maritime navigation, enhancing enjoyment of the outdoors, providing infrastructure inefficiency information, conveying pre-emptive structural deficiency data, displaying process irregularities, and enabling commercial business opportunities through its continual support and development of new thermal imaging data and analytics applications. The Company’s business model meets the needs of a multitude of customers—it sells off-the-shelf products to a wide variety of markets in an efficient, timely, and affordable manner as well as offers a variety of system configurations to suit specific customer requirements. Centered on the design of products for low cost manufacturing and high volume distribution, the Company’s commercial operating model has been developed over time and provides it with a unique ability to adapt to market changes and meet its customers’ needs.

Principles of consolidation

The accompanying consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All intercompany accounts and transactions were eliminated.

Reclassification

The Company made certain reclassifications to the prior years' financial statements to conform them to the presentation as of and for the year ended December 31, 2017. These reclassifications had no effect on consolidated financial position, net earnings, shareholders' equity, or net cash flows for any of the periods presented.

Foreign currency translation

The assets and liabilities of the Company’s subsidiaries outside the United States are translated into United States dollars at current exchange rates in effect at the balance sheet date. Revenues and expenses are translated at monthly average exchange rates. Resulting translation adjustments are reflected in accumulated other comprehensive earnings (loss) within shareholders’ equity. Transaction gains and losses that arise from exchange rate fluctuations on transactions denominated in currencies other than the functional currency are reflected as other (income) expense, net, in the Consolidated Statements of Income as incurred.

The cumulative translation adjustment included in accumulated other comprehensive earnings (loss) is a loss of $113.0 million and $164.6 million at December 31, 2017 and 2016, respectively. Transaction gains and losses included in other (income) expense, net, are net losses of $0.2 million, $2.2 million, and $2.5 million for the years ended December 31, 2017, 2016 and 2015, respectively.

Revenue recognition

Revenue is recognized when persuasive evidence of an arrangement exists, upon delivery of the product to the customer at a fixed or determinable price with a reasonable assurance of collection, passage of title and risk of loss to the customer as indicated by the contractual terms and fulfillment of all significant obligations.


Note 1.	Nature of Business and Significant Accounting Policies - (Continued)

Revenue recognition - (Continued)

The Company designs, markets and sells products primarily as commercial, off-the-shelf products. Certain customers request different system configurations, based on standard options or accessories that the Company offers. In general, revenue arrangements do not involve acceptance provisions based upon customer specified acceptance criteria. In those limited circumstances when customer specified acceptance criteria exist, revenue is deferred until customer acceptance if the Company cannot demonstrate the system meets those specifications prior to shipment. For any contracts with multiple elements (i.e., training, installation, additional parts, etc.) the Company allocates revenue among the deliverables primarily based upon objective and reliable evidence of fair value of each element in the arrangement. If objective and reliable evidence of fair value of any element is not available, the Company uses an estimated selling price for purposes of allocating the total arrangement consideration among the elements. Credit is not extended to customers and revenue is not recognized until the Company has determined that collectability is reasonably assured.

The Company’s products are sold with warranty provisions that require it to remedy deficiencies in quality or performance of the Company’s products over a specified period of time, generally twelve to twenty-four months, at no cost to its customers. Warranty liabilities are established at the time that revenue is recognized at levels that represent the Company’s estimate of the costs that will be incurred to fulfill those warranty requirements.

Provisions for estimated losses on sales or related receivables are recorded when identified. Revenue includes certain shipping and handling costs and is stated net of representative commissions and sales taxes. Service revenue is deferred and recognized over the contract period, as is the case for extended warranty contracts, or recognized as services are provided.

Cost of goods sold

Cost of goods sold includes materials, labor and overhead costs incurred in the manufacturing of products and services sold in the period as well as warranty costs. Material costs include raw materials, purchased components and sub-assemblies, outside processing and inbound freight costs. Labor and overhead costs consist of direct and indirect manufacturing costs, including wages and fringe benefits, operating supplies, depreciation, occupancy costs, and purchasing, receiving and inspection costs.

Research and development

Expenditures for research and development activities are expensed as incurred.

Cash equivalents and restricted cash

The Company considers short-term investments that are highly liquid, readily convertible into cash and have maturities of less than three months when purchased to be cash equivalents. Cash equivalents at December 31, 2017 and 2016 were $140.7 million and $8.3 million, respectively, which were primarily investments in money market funds and overnight deposits. Restricted cash includes cash that is subject to a legal or contractual restriction by a third party and restricted as to withdrawal or use, including restrictions that require the funds to be used for a specified purpose and restrictions that limit the purpose for which the funds can be used. The Company did not have any restricted cash balances at December 31, 2017 and 2016, respectively.

Accounts receivable and allowance for doubtful accounts

Accounts receivable are stated at the amounts the Company expects to collect. Credit limits are established through a process of reviewing the financial history and stability of each customer. The Company regularly evaluates the collectability of its trade receivables balances based on a combination of factors. If it is determined that a customer will be unable to fully meet its financial obligation, the Company records a specific allowance to reduce the related receivable to the amount expected to be recovered. In addition, the Company also records an allowance for all other customers based on certain other factors including the length of time the receivables are past due and historical collection experience with individual customers.

Inventories

Inventories are stated at the lower of cost or market and include materials, labor, and manufacturing overhead. Cost is determined based on a currently adjusted standard cost basis that approximates actual manufacturing cost on a first-in, first-out basis.


Note 1.	Nature of Business and Significant Accounting Policies - (Continued)

Inventories - (Continued)

Inventory write-downs are recorded when conditions exist to indicate that inventories are likely to be in excess of anticipated demand or are obsolete based upon the Company’s assumptions about future demand for its products and market conditions. The Company regularly evaluates its ability to realize the value of inventories based on a combination of factors including the following: historical usage rates, forecasted sales or usage, product end of life dates, estimated current and future market values and new product introductions. When recorded, write-downs reduce the carrying value of the Company’s inventories to their net realizable value and create a new cost-basis in the inventories. Write-downs are reflected in cost of goods sold in the Consolidated Statements of Income.

Demonstration units

The Company’s products which are being used as demonstration units are stated at the lower of cost or market and are included in prepaid expenses and other current assets in the Consolidated Balance Sheets. Demonstration units are available for sale and the Company periodically evaluates them as to marketability and realizable values. The carrying value of demonstration units was $37.6 million and $36.9 million at December 31, 2017 and 2016, respectively.

Property and equipment

Property and equipment are stated at cost and are depreciated using a straight-line methodology over their estimated useful lives. Repairs and maintenance are charged to expense as incurred.

Goodwill

Goodwill is reviewed during the third quarter of each year, or more frequently if warranted, for impairment to determine if events or changes in business conditions indicate that the carrying value may not be recoverable. The Company did not recognize any impairment charges on goodwill during the years ended December 31, 2017, 2016 and 2015. See Note 7, "Goodwill," for additional information.

Intangible assets

Intangible assets are amortized using a straight-line methodology over their estimated useful lives. Intangible assets with indefinite useful lives are evaluated annually for impairment, or more frequently if required. The Company did not recognize any impairment charges on intangible assets with indefinite lives during the years ended December 31, 2017, 2016 and 2015.

Impairment of long-lived assets

Long-lived asset groups are reviewed for impairment when circumstances indicate that the carrying amounts may not be recoverable. Impairment exists when the carrying value is greater than the expected undiscounted future cash flows expected to be provided by the asset group. If impairment exists, the asset group is written down to its fair value. The Company did not recognize any impairment charges on long-lived assets during the years ended December 31, 2017, 2016 and 2015.

Advertising costs

Advertising costs, which are included in selling, general and administrative expenses, are expensed as incurred. Advertising costs for the years ended December 31, 2017, 2016 and 2015 were $19.2 million, $19.3 million and $18.7 million, respectively.

Cost-basis investments

The Company has private company investments, which consist of investments for which the Company does not have the ability to exercise significant influence, and are accounted for under the cost method. The investments are carried at cost and adjusted only when the Company believes that events have occurred that are likely to have a significant other-than-temporary adverse effect on the estimated fair value of the investments. If no such events have occurred, the fair value of the investments is not calculated as it is not required. The carrying value of those investments were $3.1 million and $3.2 million at December 31, 2017 and 2016, respectively. The investments are included in other assets in the Consolidated Balance Sheets.


Note 1.	Nature of Business and Significant Accounting Policies - (Continued)

Contingencies

The Company is subject to the possibility of loss contingencies arising in the normal course of business. An estimated loss is accrued when the Company determines that it is probable that an asset has been impaired or a liability has been incurred and the amount can be reasonably estimated. The Company regularly evaluates current available information to determine whether such accruals and disclosures should be adjusted.

Earnings per share

Basic earnings per share is based on the weighted average number of shares of common stock outstanding during the period. Diluted earnings per share is computed similar to basic earnings per share except that the weighted shares outstanding are increased to include additional shares from the assumed exercise of stock options, if dilutive, and the assumed issuance of shares upon vesting of restricted stock awards.

The following table sets forth the reconciliation of the numerator and denominator utilized in the computation of basic and diluted earnings per share (in thousands):



	Year Ended December 31,
	2017		2016		2015
Numerator for earnings per share:
Net earnings for basic and diluted earnings per share	$	107,223	$	166,626	$	241,686
Denominator for earnings per share:
Weighted average number of common shares outstanding	137,456		137,138		139,353
Assumed exercise of stock options and vesting of restricted stock awards, net of shares assumed reacquired under the treasury stock method	2,190		1,359		1,421
Diluted shares outstanding	139,646		138,497		140,774

The effect of stock-based compensation awards for the years ended December 31, 2017, 2016 and 2015 that aggregated 39,000, 233,000 and 354,000 shares, respectively, have been excluded for purposes of diluted earnings per share since the effect of their inclusion would have been anti-dilutive.

Supplemental cash flow disclosure (in thousands)



	Year Ended December 31,
	2017		2016		2015
Cash paid for:
Interest	$	15,394	$	15,815	$	13,039
Taxes	$	72,340	$	32,465	$	68,534

Stock-based compensation

The Company uses the Black-Scholes option pricing model to estimate the fair value of stock option awards and shares expected to be issued under the Company's employee stock purchase plan. Nonvested stock awards (referred to as restricted stock unit awards) are valued based on the fair market value of the Company's stock, discounted for expected dividends, on the date of grant. Restricted stock units containing performance-based vesting criteria are valued on the date of grant based on the fair value of the Company's stock, discounted for expected dividends and an estimate for illiquidity. The fair value of market-based restricted stock units is determined on the date of grant using a lattice-based option-pricing valuation model that incorporates a Monte-Carlo simulation and a discount for illiquidity. The estimated discount for illiquidity is relevant for share based awards that require the plan participant to hold the shares for a specified period of time after the award vests and is estimated using the protective put method. The Company recognizes the compensation expense for all stock-based compensation awards on a straight-line basis over the requisite service period of each award.


Note 1.	Nature of Business and Significant Accounting Policies - (Continued)

Stock-based compensation - (Continued)

The following table sets forth the stock-based compensation expense recognized in the Consolidated Statements of Income for the years ended December 31, 2017, 2016 and 2015 (in thousands):



	Year Ended December 31,
	2017		2016		2015
Cost of goods sold	$	2,665	$	3,103	$	3,001
Research and development	5,068		4,815		4,694
Selling, general and administrative	23,285		19,879		18,053
Stock-based compensation expense before income taxes	$	31,018	$	27,797	$	25,748

Stock-based compensation expense capitalized in the Consolidated Balance Sheets as of December 31, 2017, 2016 and 2015 is as follows (in thousands):



	December 31,
	2017		2016		2015
Capitalized in inventory	$	1,062	$	567	$	691

As of December 31, 2017, the Company had approximately $42.0 million of total unrecognized stock-based compensation costs, net of estimated forfeitures, to be recognized over a weighted average period of 2.09 years.

The fair value of the stock-based awards granted in the years ended December 31, 2017, 2016 and 2015 was estimated with the following weighted-average assumptions:



	2017		2016		2015
Stock option awards:
Risk-free interest rate	1.8	%	0.9	%	0.2	%
Expected dividend yield	1.6	%	1.6	%	1.4	%
Expected term	6.0 years		4.3 years		4.1 years
Expected volatility	26.6	%	25.6	%	26.6	%
Performance-based restricted stock awards:
Expected dividend yield	1.6	%	1.6	%	—
Discount for illiquidity	—		9.9	%	—
Market-based restricted stock awards:
Risk-free interest rate	—		0.9	%	0.9	%
Expected dividend yield	—		1.6	%	1.4	%
Expected term	—		4.0 years		4.0 years
Expected volatility	—		25.8	%	27.5	%
Expected volatility of S&P 500	—		25.0	%	23.4	%
Discount for illiquidity	—		9.9	%	10.9	%
Employee stock purchase plan:
Risk-free interest rate	1.0	%	0.5	%	0.4	%
Expected dividend yield	1.6	%	1.5	%	1.5	%
Expected term	6 months		6 months		6 months
Expected volatility	20.9	%	27.0	%	21.5	%
Discount for illiquidity	10.5	%	10.5	%	—


Note 1.	Nature of Business and Significant Accounting Policies - (Continued)

Stock-based compensation - (Continued)

The Company uses the United States Treasury (constant maturity) interest rate on the date of grant as the risk-free interest rate and uses historical volatility as the expected volatility. The Company’s determination of expected term is based on an analysis of historical and expected exercise patterns. In 2017, 2016 and 2015, all stock options granted were time-based options. The Company uses an estimated forfeiture rate of 5 percent of the stock-compensation expense of non-executive employees based on an analysis of historical and expected forfeitures.

During the years ended December 31, 2017, 2016 and 2015, the Company granted approximately 773,000, 865,000 and 804,000 time-vested restricted stock units, respectively. The fair value of time-vested restricted stock units is fixed and determined on the date of grant based upon the Company's stock price on the date of grant. The weighted average fair values of the time-vested restricted stock units granted during the years ended December 31, 2017, 2016 and 2015 were $36.20, $29.48 and $26.30 per share, respectively.

During the year ended December 31, 2016 and 2015, the Company granted approximately 64,000 and 128,000 market-based restricted stock units, respectively. These units may be earned based upon the Company's total shareholder return compared to the total shareholder return over a three year period of the component company at the 60th percentile level in the S&P 500 Index. Shares vested under the market-based restricted stock unit awards must be held by the participant for a period of one year from the vest date. The fair value of the market-based restricted stock units granted during the year ended December 31, 2016 and 2015 was $22.89 and $25.55 per share, respectively.

During the years ended December 31, 2017 and 2016, the Company granted approximately 283,000 and 62,000 performance-based restricted stock units, respectively. These units are earned based upon the Company's return on invested capital over a three year period. The fair value of the performance-based restricted units granted during the years ended December 31, 2017 and 2016 was $35.08 and $26.41 per share, respectively.

The total fair value of the restricted stock unit awards granted during the year ended December 31, 2017 in the table below of $37.9 million includes $9.9 million of grant date fair value associated with the performance-based restricted stock units. The total fair value of the restricted stock unit awards granted during the year ended December 31, 2016 in the table below of $28.6 million includes $1.5 million of grant date fair value associated with the market-based restricted stock units and $1.6 million of grant date fair value associated with the performance-based restricted stock units.

The weighted-average fair value of stock-based compensation awards granted and vested, and the intrinsic value of options exercised during the period were (in thousands, except per share amounts):



	Years Ended December 31,
	2017		2016		2015
Stock option awards:
Weighted average grant date fair value per share	$	8.55	$	5.68	$	5.60
Total fair value of awards granted	$	2,824	$	4,716	$	4,170
Total fair value of awards vested	$	4,203	$	4,407	$	4,290
Total intrinsic value of options exercised	$	20,631	$	6,170	$	15,585
Restricted stock unit awards:
Weighted average grant date fair value per share	$	35.90	$	28.86	$	29.12
Total fair value of awards granted	$	37,906	$	28,603	$	27,150
Total fair value of awards vested	$	27,489	$	21,130	$	24,458
Employee stock purchase plan:
Weighted average grant date fair value per share	$	7.66	$	6.33	$	5.83
Total fair value of shares estimated to be issued	$	1,087	$	923	$	951

The total amount of cash received from the exercise of stock options in the years ended December 31, 2017, 2016 and 2015 was $53.5 million, $7.7 million and $20.8 million, respectively, and the related tax benefits realized from the exercise of the stock options in the years ended December 31, 2017, 2016 and 2015 was $3.0 million, $1.3 million and $3.9 million, respectively.


Note 1.	Nature of Business and Significant Accounting Policies - (Continued)

Concentration of risk

Financial instruments that potentially subject the Company to concentration of credit risk consist primarily of accounts receivable. Concentration of credit risk with respect to accounts receivable is limited because a relatively large number of geographically diverse customers make up the Company’s customer base, thus diversifying the trade credit risk. The Company controls credit risk through credit approvals, credit limits and monitoring procedures. The Company performs credit evaluations for all new customers and requires letters of credit, bank guarantees and advanced payments, if deemed necessary.

A substantial portion of the Company’s revenue is derived from sales to United States and foreign government agencies (see Note 17, "Operating Segments and Related Information"). The Company also purchases certain key components from sole or limited source suppliers.

The Company maintains cash deposits with major banks that from time to time may exceed federally insured limits. The Company periodically assesses the financial condition of the institutions and instruments in which it invests and adjusts its investment balances to mitigate the risk of principal loss.

Use of estimates

The preparation of financial statements in conformity with United States generally accepted accounting principles requires management to make estimates and judgments that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting period. Significant estimates and judgments made by management of the Company include matters such as collectability of accounts receivable, realizability of inventories, recoverability of deferred tax assets, impairment tests of goodwill, intangible assets and other long-lived assets, recognition and measurement of loss contingencies and adequacy of warranty accruals. Actual results could differ from those estimates. The Company believes that the estimates used are reasonable.

Accumulated other comprehensive earnings (loss)

Accumulated other comprehensive earnings (loss) includes cumulative translation adjustments, fair value adjustments on interest rate swap contracts, unrealized gains and losses on available-for-sale securities and changes in minimum liability for pension plans. Foreign currency translation adjustments included in comprehensive income were not tax affected as investments in international affiliates are deemed to be indefinite in duration.

The following table sets forth the changes in the balances of each component of accumulated other comprehensive earnings (loss) for the year ended December 31, 2017:



	Pension Plans Items			Interest Rate Swap Contracts			Available-For-Sale Items			Foreign Currency Items			Total
Balance, December 31, 2016	$	(1,615	)	$	307		$	—		$	(164,643	)	$	(165,951	)
Other comprehensive income (loss) before reclassifications, net of tax	1,286			187			(4		)	51,631			53,100
Amounts reclassified from accumulated other comprehensive earnings (loss), net of tax	(15		)	(494		)	—			—			(509		)
Net current period other comprehensive income (loss), net of tax	1,271			(307		)	(4		)	51,631			52,591
Balance, December 31, 2017	$	(344	)	$	—		$	(4	)	$	(113,012	)	$	(113,360	)

The amounts reclassified from accumulated other comprehensive earnings (loss) for interest rate swap contracts have been recorded to interest expense in the Company's Consolidated Statement of Income for the year ended December 31, 2017.


Note 1.	Nature of Business and Significant Accounting Policies - (Continued)

Recent accounting pronouncements

Effective January 1, 2017, the Company adopted the Financial Accounting Standards Board ("FASB") Accounting Standards Update 2016-09, "Improvements to Employee Share-Based Payment Accounting" ("ASU 2016-09"). The standard update simplifies several aspects of the accounting for employee share-based payment transactions, including accounting for income taxes, forfeitures, and statutory withholding requirements, as well as classification in the Consolidated Statements of Cash Flows. As a result of the adoption, on a prospective basis, the Company recognized $4.5 million of excess tax benefits from stock-based compensation as a discrete item in income tax provision for the year ended December 31, 2017. Historically, this amount was recorded as additional paid-in capital. Upon adoption, the Company elected to apply the change retrospectively to the Consolidated Statement of Cash Flows which resulted in a reclassification of excess tax benefits from stock-based compensation of $1.5 million and $8.2 million from cash flows from financing activities to cash flows from operating activities for the year ended December 31, 2016 and 2015, respectively. Additionally, $6.0 million and $9.4 million paid in cash to satisfy withholding requirements for net settlement of restricted stock unit shares vested and stock options exercised has been reclassified from cash flows from operating activities to cash flows from financing activities to conform to the presentation required by the new standard in the Consolidated Statement of Cash Flows for the year ended December 31, 2016 and 2015, respectively. ASU 2016-09 also requires excess tax benefits and deficiencies to be excluded from the assumed future proceeds in the calculation of diluted shares. This change resulted in an increase in diluted weighted average shares outstanding of 492,000 shares for the year ended December 31, 2017. The Company elected not to change its policy on accounting for forfeitures and will continue to estimate a requisite forfeiture rate. Additional amendments to the accounting for income taxes and minimum statutory withholding requirements had no impact on the Company's results of operations.

In May 2014, the FASB issued Accounting Standards Update No. 2014-09, "Revenue from Contracts with Customers" ("ASU 2014-09" or "Topic 606"), which establishes new guidance under which companies will recognize revenue to depict the transfer of 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. ASU 2014-09 also provides for additional disclosure requirements. Subsequently, the FASB has issued several amendments to the new standard to clarify the implementation. ASU 2014-09 is effective for interim and annual reporting periods beginning after December 15, 2017 and may be applied retrospectively or on a modified retrospective transition basis. The Company currently intends to adopt ASU 2016-09 on January 1, 2018 using the modified retrospective approach.

The Company has substantially completed its review of the accounting systems and processes required from adopting the new standard, including the application of the modified retrospective method for adoption. Additionally, the Company has completed the assessment phase and documentation of new policies and evaluation of it internal controls framework and is currently in the process of gathering data for the new disclosure requirements. The Company does not expect a significant change in its control environment due to the adoption of the new standard.

Upon adoption, the Company does not expect a material impact to the opening balance sheet as of January 1, 2018 related to the modified retrospective effect. Although the impact of the new standard will greatly increase the amount of required disclosures the Company expects revenue recognition for the broad portfolio of its products and services offerings to remain largely unchanged. However, the guidance is expected to change the timing of revenue recognition in certain area, including accounting for complex and highly customized systems integrations when there is no alternative use for assets produced and termination for convenience clauses entitle the Company to receive cost plus a reasonable margin in the event of early termination. Such contracts represent a minor subset of the Company's total portfolio, however, such arrangements may represent a significant amount of revenue in a given period. Such contracts and other aspects of the new standard expected to impact the Company are described in further detail below:

•Integration, engineering services and highly customized products: Topic 606 requires revenue recognition when (or as) the Company satisfies a performance obligation by transferring control of a promised good or service to a customer. If the Company's performance does not create an asset with an alternative use and termination for convenience clauses provide an enforceable right to payment for performance completed to date (including fees representing a reasonable profit), revenue would be recognized over time as the performance obligation is satisfied, rather than the point in time when final delivery or acceptance occurs. Though not expected to impact the vast majority of the Company's contracts with customers, over-time revenue recognition may be required on certain contracts which would have been recognized at a point in time under current standards.


Note 1.	Nature of Business and Significant Accounting Policies - (Continued)

Recent accounting pronouncements - (Continued)

•Contract acquisition costs: Topic 606 requires the deferral and amortization of "incremental" costs incurred to obtain a contract. The primary contract acquisition cost for the Company are sales commissions. While the majority of the Company's sales commissions are not earned upon contract acquisition, all commissions are currently expensed when earned. The change required by Topic 606 may result in the creation of an asset on the opening balance sheet at January 1, 2018. The impact is not expected to be material as the Company has limited agreements providing for commissions earned upon contract acquisition and also because it intends to elect the practical expedient to omit recognition of contract acquisition assets if the amortization period of the asset that otherwise would be recognized is one year or less.

•Variable consideration: Some of the Company's contracts with customers include notification or acceptance provisions that preclude revenue recognition because of the requirement for amounts to be fixed or determinable under the current standards. Topic 606 requires the Company to estimate and account for variable consideration using either the probability-weighted expected amount or the most likely amount and estimate the transaction price to recognize when or as control is transferred to the customer. Though not applicable to the vast majority of the Company's contracts, revenue for certain customer contracts may be recognized earlier than it would be under current standards as transaction prices are estimated upon transfer of control rather than at the point when the price is considered fixed or determinable.

•Allocation of transaction price: Similar to current standards, Topic 606 requires an allocation of arrangement consideration between deliverables within a transaction. Current GAAP restricts the allocation of revenue that is contingent on future deliverables to current deliverables, however Topic 606 removes this restriction. Though expected to be rare, this change could result in the Company recognizing a portion of a contract earlier during the performance period, even if payment is contingent upon future deliverables.

The Company will continue to assess the impact of the adoption as it completes its processes and internal controls necessary to gather information required for the new disclosures beginning in the first quarter ending March 31, 2018. As discussed above, the adoption of the new standard is not expected to have a material impact on the opening balance sheet as of January 1, 2018. However, this expectation is based on many variables, which are subject to change.

In February 2016, the FASB issued Accounting Standards Update No. 2016-02, “Leases (Topic 842)” (“ASU 2016-02”). The amendments in this update require the identification of arrangements that should be accounted for as leases by lessees. In general, for lease arrangements exceeding a twelve month term, these arrangements must now be recognized as assets and liabilities on the balance sheet of the lessee. ASU 2016-02 requires the use of the modified retrospective method, which will require adjustment to all comparative periods presented in the consolidated financial statements. ASU 2016-09 is effective for interim and annual reporting periods beginning after December 15, 2018, with early adoption permitted, and the Company currently intends to adopt ASU 2016-02 on January 1, 2019. The Company is assessing the impact ASU 2016-02 will have on its consolidated financial statements and expects that the primary impact upon adoption will be the recognition, on a discounted basis, of its minimum commitments under noncancelable operating leases on its consolidated balance sheets resulting in the recording of right of use assets and lease obligations. The Company's current minimum commitments under noncancelable operating leases are disclosed in Note 12.

In October 2016, the FASB issued Accounting Standards Update No. 2016-16, “Intra-Entity Transfers of Assets Other Than Inventory” ("ASU 2016-16"). The amendments in this update eliminate the exception of recognizing, at the time of transfer, current and deferred income taxes for intra-entity asset transfers other than inventory. ASU 2016-16 is effective for interim and annual reporting periods beginning after December 15, 2017 and should be applied on a modified retrospective transition basis. The Company is currently planning to adopt ASU 2016-16 on January 1, 2018. As of December 31, 2017, the Company has a remaining deferred tax benefit of $7.0 million recorded in prepaid expenses and other current assets, which represents the tax benefit that was deferred in accordance with the current GAAP. Upon adoption, the Company will recognize this amount through a cumulative-effect adjustment to retained earnings.


Note 1.	Nature of Business and Significant Accounting Policies - (Continued)

Recent accounting pronouncements - (Continued)

In November 2016, the FASB issued Accounting Standards Update No. 2016-18, "Statement of Cash Flows (Topic 230): Restricted Cash" ("ASU 2016-18"). This update clarifies guidance on the classification and presentation of restricted cash in the statement of cash flows. The amendment requires restricted cash be included in an entity's cash and cash-equivalent balances in the statement of cash flows and also requires an entity to disclose information about the nature of the restrictions. Further, a reconciliation between the statement of financial position and the statement of cash flows must be disclosed when the statement of financial position includes more than one line item for cash, cash equivalents, restricted cash, and restricted cash equivalents. ASU 2016-18 should be applied on a retrospective basis and is effective for interim and annual reporting periods beginning after December 15, 2017. The Company currently intends to adopt ASU 2016-18 on January 1, 2018, and does not expect the adoption to have a material impact on its consolidated financial statements.

In January 2017, the FASB issued Accounting Standards Update No. 2017-01, "Business Combinations (Topic 805): Clarifying the Definition of a Business" ("ASU 2017-01"). The amendments in this update clarify the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. ASU 2017-01 is effective for interim and annual reporting periods beginning after December 15, 2017. The Company currently intends to adopt ASU 2017-01 on January 1, 2018, and does not expect the adoption to have a material impact on its consolidated financial statements.

In January 2017, the FASB issued Accounting Standards Updated No. 2017-04, “Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment” (“ASU 2017-04”). The amendments in this update simplify the subsequent measurement of goodwill by removing the second step of the two-step impairment test. The amendment requires an entity to perform its annual, or interim goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An impairment charge should be recognized for the amount by which the carrying amount exceeds the reporting unit's fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. The amendment should be applied on a prospective basis. ASU 2017-04 is effective for annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The amendments in ASU 2017-04 are to be applied on a prospective basis and are not expected to have a material impact on the Company's consolidated financial statements.