Accounting Policies (Policies)

6 Months Ended

Jun. 30, 2018

Reclassification. Certain prior year amounts have been reclassified to conform to the 2018 presentation in the condensed consolidated financial statements.

Recently Adopted Accounting Pronouncements and Recently Issued Accounting Pronouncements

Recently Adopted Accounting Pronouncements. In May 2014, the Financial Accounting Standards Board ("FASB") issued a new standard for revenue recognition, Accounting Standards Codification ("ASC") 606. The purpose of ASC 606 is to provide a single, comprehensive revenue recognition model for all contracts with customers to improve comparability across industries. We adopted ASC 606 on January 1, 2018, under the full retrospective method of adoption. As a result of this adoption, net sales increased by $9 million and $10 million for the three-month and six-month periods ended June 30, 2017, respectively, and operating profit (and income before income taxes) increased by $7 million and $4 million for the three-month and six-month periods ended June 30, 2017, respectively, from what was previously reported. For full year 2017 and 2016, net sales decreased by $2 million and increased by $4 million, respectively, and operating profit (and income before income taxes) decreased by $1 million and increased by $2 million, respectively, from what was previously reported. We additionally have recasted our previously reported segment operating results at the end of this section.

In January 2016, the FASB issued ASU 2016-01, "Financial Instruments-Overall: Recognition and Measurement of Financial Assets and Financial Liabilities," which primarily affects the accounting for equity investments, financial liabilities under the fair value option, and the presentation and disclosure requirements for financial instruments. We adopted ASU 2016-01 on January 1, 2018. The adoption of this standard did not have a material impact on our financial position or results of operations.

In October 2016, the FASB issued ASU 2016-16, "Income Taxes (Topic 740): Intra-Entity Asset Transfers of Assets Other than Inventory," which no longer allows the tax effects of intra-entity asset transfers (intercompany sales) of assets other than inventory to be deferred until the transferred asset is sold to a third party or otherwise recovered through use. The new standard requires the tax expense from the sale of the asset in the seller's tax jurisdiction and the corresponding basis differences in the buyer's jurisdiction to be recognized when the transfer occurs even though the pre-tax effects of the transaction are eliminated in consolidation. We adopted ASU 2016-16 on January 1, 2018. The adoption of this standard did not have a material impact on our financial position or results of operations.

A. ACCOUNTING POLICIES (Continued)

In March 2017, the FASB issued ASU 2017-07, "Compensation-Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost," which modifies the presentation of net periodic pension and post-retirement benefit cost ("net benefit cost") in the income statement and the components eligible for capitalization as assets. ASU 2017-07 requires retrospective application for certain aspects of the standard. We adopted ASU 2017-07 on January 1, 2018. As a result of the adoption, we reclassified $8 million and $15 million of net benefit cost from operating profit to other income (expense), net, within our results of operations for the three-month and six-month periods ended June 30, 2017, respectively. For full year 2017 and 2016, we reclassified $26 million and $32 million, respectively, of net benefit cost from operating profit to other income (expense), net, within our results of operations. We additionally have recasted our previously reported segment operating results at the end of this section. The adoption of the standard did not impact income before income taxes.

In May 2017, the FASB issued ASU 2017-09, "Compensation-Stock Compensation (Topic 718): Scope of Modification Accounting," which clarifies when to account for a change to the terms or conditions of a share-based payment award as a modification. We adopted ASU 2017-09 on January 1, 2018. The adoption of this standard did not impact our financial position or results of operations; however, modification accounting is now required only if the fair value, the vesting conditions, or the classification of the award (as equity or liability) changes as a result of the change in terms or conditions.

In February 2018, the FASB issued ASU 2018-02, "Income Statement—Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income," which permits a company to reclassify from accumulated other comprehensive income (loss) to retained earnings the disproportionate tax effects resulting from the Tax Cuts and Jobs Act of 2017 (“2017 Act”). We early adopted ASU 2018-02 on March 31, 2018. As a result of the adoption, in the first quarter of 2018 we decreased accumulated other comprehensive income (loss) and increased retained earnings (deficit) by the $59 million disproportionate tax effect caused by the 2017 Act.

Impact of Adoption of ASC 606 and ASU 2017-07. The recasted impact of the adoptions of ASC 606 and ASU 2017-07 to our previously reported operating results and basic and diluted income per share was as follows, in millions (except per common share data):



	Year Ended December 31, 2016
	Net Sales				Operating Profit (Loss)
	As Reported		As Recasted		As Reported			As Recasted
Operations by segment:
Plumbing Products	$	3,526	$	3,529	$	642		$	654
Decorative Architectural Products	2,092		2,092		430			433
Cabinetry Products	970		970		93			97
Windows and Other Specialty Products	769		770		(3		)	(3		)
Total	$	7,357	$	7,361	1,162			1,181
General corporate expense, net					(109		)	(94		)
Operating profit					$	1,053		$	1,087

					Year Ended December 31, 2016
					As Reported			As Recasted
Net income attributable to Masco Corporation					$	491		$	493
Income per common share attributable to Masco Corporation:
Basic:					$	1.49		$	1.49
Diluted:					$	1.47		$	1.48

A. ACCOUNTING POLICIES (Continued)



	Three Months Ended March 31, 2017
	Net Sales				Operating Profit (Loss)
	As Reported		As Recasted		As Reported			As Recasted
Operations by segment:
Plumbing Products	$	863	$	872	$	156		$	162
Decorative Architectural Products	505		496		101			94
Cabinetry Products	231		231		16			16
Windows and Other Specialty Products	178		179		6			8
Total	$	1,777	$	1,778	279			280
General corporate expense, net					(26		)	(23		)
Operating profit					$	253		$	257

					Three Months Ended March 31, 2017
					As Reported			As Recasted
Net income attributable to Masco Corporation					$	140		$	138
Income per common share attributable to Masco Corporation:
Basic:					$	0.44		$	0.43
Diluted:					$	0.43		$	0.43



	Three Months Ended June 30, 2017										Six Months Ended June 30, 2017
	Net Sales				Operating Profit (Loss)						Net Sales				Operating Profit (Loss)
	As Reported		As Recasted		As Reported			As Recasted			As Reported		As Recasted		As Reported			As Recasted
Operations by segment:
Plumbing Products	$	949	$	949	$	198		$	200		$	1,812	$	1,821	$	354		$	362
Decorative Architectural Products	653		661		141			149			1,158		1,157		242			243
Cabinetry Products	251		251		30			31			482		482		46			47
Windows and Other Specialty Products	204		205		18			18			382		384		24			26
Total	$	2,057	$	2,066	387			398			$	3,834	$	3,844	666			678
General corporate expense, net					(30		)	(26		)					(56		)	(49		)
Operating profit					$	357		$	372						$	610		$	629

											Three Months Ended June 30, 2017				Six Months Ended June 30, 2017
											As Reported		As Recasted		As Reported			As Recasted
Net income attributable to Masco Corporation											$	158	$	163	$	298		$	301
Income per common share attributable to Masco Corporation:
Basic:											$	0.50	$	0.51	$	0.93		$	0.94
Diluted:											$	0.49	$	0.51	$	0.92		$	0.93

A. ACCOUNTING POLICIES (Continued)



	Three Months Ended September 30, 2017										Nine Months Ended September 30, 2017
	Net Sales				Operating Profit (Loss)						Net Sales				Operating Profit (Loss)
	As Reported		As Recasted		As Reported			As Recasted			As Reported		As Recasted		As Reported			As Recasted
Operations by segment:
Plumbing Products	$	951	$	950	$	175		$	175		$	2,763	$	2,771	$	529		$	537
Decorative Architectural Products	553		562		104			112			1,711		1,719		346			355
Cabinetry Products	229		229		19			20			711		711		65			67
Windows and Other Specialty Products	203		204		23			24			585		588		47			50
Total	$	1,936	$	1,945	321			331			$	5,770	$	5,789	987			1,009
General corporate expense, net					(26		)	(22		)					(82		)	(71		)
Operating profit					$	295		$	309						$	905		$	938

											Three Months Ended September 30, 2017				Nine Months Ended September 30, 2017
											As Reported		As Recasted		As Reported			As Recasted
Net income attributable to Masco Corporation											$	148	$	152	$	446		$	453
Income per common share attributable to Masco Corporation:
Basic:											$	0.47	$	0.48	$	1.40		$	1.42
Diluted:											$	0.46	$	0.48	$	1.38		$	1.41



	Three Months Ended December 31, 2017										Year Ended December 31, 2017
	Net Sales				Operating Profit (Loss)						Net Sales				Operating Profit (Loss)
	As Reported		As Recasted		As Reported			As Recasted			As Reported		As Recasted		As Reported			As Recasted
Operations by segment:
Plumbing Products	$	972	$	961	$	169		$	165		$	3,735	$	3,732	$	698		$	702
Decorative Architectural Products	494		487		88			83			2,205		2,206		434			438
Cabinetry Products	223		223		25			25			934		934		90			92
Windows and Other Specialty Products	185		182		5			4			770		770		52			54
Total	$	1,874	$	1,853	287			277			$	7,644	$	7,642	1,274			1,286
General corporate expense, net					(23		)	(21		)					(105		)	(92		)
Operating profit					$	264		$	256						$	1,169		$	1,194

											Three Months Ended December 31, 2017				Year Ended December 31, 2017
											As Reported		As Recasted		As Reported			As Recasted
Net income attributable to Masco Corporation											$	87	$	80	$	533		$	533
Income per common share attributable to Masco Corporation:
Basic:											$	0.28	$	0.25	$	1.68		$	1.68
Diluted:											$	0.27	$	0.25	$	1.66		$	1.66

A. ACCOUNTING POLICIES (Concluded)

Recently Issued Accounting Pronouncements. In February 2016, the FASB issued a new standard for leases, ASC 842, which changes the accounting model for identifying and accounting for leases. ASC 842 is effective for us for annual periods beginning January 1, 2019. We expect this standard to increase our total assets and total liabilities; however, we are currently evaluating the magnitude of the impact. We do not expect the standard to have a material impact on our results of operations. In preparation for the adoption of the standard, we have procured a third-party software to track and manage our leases and have trained our business units on the new standard and the use of the software.

In June 2016, the FASB issued ASU 2016-13, "Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments," which modifies the methodology for recognizing loss impairments on certain types of financial instruments, including receivables. The new methodology requires an entity to estimate the credit losses expected over the life of an exposure. Additionally, ASU 2016-13 amends the current available-for-sale security other-than-temporary impairment model for debt securities. ASU 2016-13 is effective for us for annual periods beginning January 1, 2020. We are currently evaluating the impact the adoption of this new standard will have on our financial position and results of operations.

In August 2017, the FASB issued ASU 2017-12, "Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities," which improves and simplifies accounting rules around hedge accounting and better portrays the economic results of an entity's risk management activities in its financial statements. ASU 2017-12 is effective for us for annual periods beginning January 1, 2019. We are currently evaluating the impact the adoption of this new standard will have on our financial position and results of operations.

Revenue Recognition, Policy

We recognize revenue as control of our products is transferred to our customers, which is generally at the time of shipment or upon delivery based on the contractual terms with our customers, or when services are completed. Control over certain of our custom-made window products transfers to our customers as production is completed, and revenue is recognized over the production period for these products, as our products do not have an alternative use and we have an enforceable right to payment during the production period. The production period of our custom-made window products generally does not lapse days, and for these products we currently recognize revenue based on the output of production, which is a faithful depiction of the transfer of these products to our customers. Our customers' payment terms generally range from 30 to 65 days of fulfilling our performance obligations and recognizing revenue.

We consider shipping and handling activities performed by us as activities to fulfill the sales of our products. Amounts billed for shipping and handling are included in net sales, while costs incurred for shipping and handling are included in cost of sales. We capitalize incremental costs of obtaining a contract and expense the costs on a straight-line basis over the contractual period if the cost is recoverable, the cost would not have been incurred without the contract and the term of the contract is greater than one year; otherwise, we expense the amounts as incurred. We do not adjust the promised amount of consideration for the effects of a financing component if the period between when we transfer our products or services and when our customers pay for our products or services is expected to be one year or less.

Revenue Recognition, Revenue Reductions

We provide customer programs and incentive offerings, including special pricing and co-operative advertising arrangements, promotions and other volume-based incentives. These customer programs and incentives are considered variable consideration. We include in revenue variable consideration only to the extent that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the variable consideration is resolved. This determination is made based upon known customer program and incentive offerings at the time of sale, and expected sales volume forecasts as it relates to our volume-based incentives. This determination is updated each reporting period. We recognized $6 million and $3 million for the three-month and six-month periods ended June 30, 2018, respectively, and $8 million and $7 million for the three-month and six-month periods ended June 30, 2017, respectively, of revenue related to performance obligations settled in previous periods.

Revenue Recognition, Sales Returns

Certain product sales include a right of return. We estimate future product returns at the time of sale based on historical experience and record a corresponding refund liability. We additionally record an asset, based on historical experience, for the amount of product we expect to return to inventory as a result of the return, which is recorded in prepaid expenses and other in the condensed consolidated balance sheets.