Recently issued accounting pronouncements

Recently adopted accounting pronouncements

Stock-based compensation

In June 2014, the FASB issued new guidance related to stock compensation. The new standard requires that a performance target that affects vesting, and that could be achieved after the requisite service period, be treated as a performance condition. As such, the performance target should not be reflected in estimating the grant date fair value of the award. This update further clarifies that compensation cost should be recognized in the period in which it becomes probable that the performance target will be achieved and should represent the compensation cost attributable to the periods for which the requisite service has already been rendered. We adopted this new standard as of January 1, 2016, and applied it prospectively. The adoption of this guidance did not have a material impact on our condensed consolidated financial statements.

Consolidations

In February 2015, the FASB issued new guidance related to consolidations. The new standard amends certain requirements for determining whether a variable interest entity must be consolidated. We adopted this new standard as of January 1, 2016. The adoption of this guidance did not have a material impact on our condensed consolidated financial statements.

Debt Issuance Costs

In April 2015, the FASB issued new guidance related to the presentation of debt issuance costs in financial statements. The new standard requires an entity to present such costs in the balance sheet as a direct deduction from the related debt liability rather than as an asset. Amortization of the costs will continue to be reported as interest expense. We adopted this change in accounting principle as of January 1, 2016, and applied it retrospectively for each period presented. The adoption of this guidance did not have a material impact on our condensed consolidated financial statements.

Internal-Use Software

In April 2015, the FASB issued new guidance related to internal-use software. The new standard relates to a customer’s accounting for fees paid in cloud computing arrangements. The amendment provides guidance for customers to determine whether such arrangements include software licenses. If a cloud arrangement includes a software license, then the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract. We adopted this standard as of January 1, 2016, and applied it prospectively. The adoption of this guidance did not have a material impact on our condensed consolidated financial statements.

Business Combinations

In September 2015, the FASB issued new guidance related to business combinations. The new standard requires that the cumulative impact of a measurement period adjustment, including the impact on prior periods, on provisional amounts recorded at the acquisition date as a result of the business combination be recognized in the reporting period the adjustment is identified. The standard also requires separate presentation on the face of the income statement, or disclosure in the notes, of the portion of the amount recorded in current period earnings by line item. Prior to the issuance of the standard, such adjustments to provisional amounts were recognized retrospectively. We adopted this new standard as of January 1, 2016, and applied it prospectively. No measurement period adjustments impacting earnings occurred as of and for the nine months ended September 30, 2016.

Share-Based Payments

In March 2016, the FASB issued new guidance to simplify accounting for share-based payments. The new standard, amongst other things:


•	requires that all excess tax benefits and tax deficiencies be recorded as an income tax expense or benefit in the statement of operations and that the tax effects of exercised or vested awards be treated as discrete items in the reporting period in which they occur;


•	requires excess tax benefits from share-based payments to be reported as operating activities on the statement of cash flows; and


•	permits an accounting policy election to either estimate the number of awards that are expected to vest using an estimated forfeiture rate, as currently required, or account for forfeitures when they occur.

We elected to early adopt this new standard in the third quarter of 2016, which requires us to reflect any adjustments as of January 1, 2016. As part of the adoption, we made certain elections, including the following:


•	to apply the presentation requirements for our condensed consolidated statement of cash flows related to excess tax benefits retrospectively to all periods presented; and


•	to continue to estimate the number of awards that are expected to vest using an estimated forfeiture rate.

As a result of the adoption we recognized excess tax benefits of $12 million and $63 million as a reduction to income tax expense in our condensed consolidated statement of operations for the three and nine months ended September 30, 2016, respectively. The adoption of the standard impacted our previously reported quarterly results and financial positions for fiscal year 2016 as follows:



	For the Six Months Ended June 30, 2016				For the Three Months Ended June 30, 2016				For the Three Months Ended March 31, 2016
(Amounts in millions, except per share data)	As reported		As adjusted		As reported		As adjusted		As reported		As adjusted
Condensed consolidated statements of operations:
Income before income tax expense	$	576	$	576	$	167	$	167	$	409	$	409
Income tax expense	$	113	$	62	$	40	$	16	$	73	$	46
Net Income	$	463	$	514	$	127	$	151	$	336	$	363
Basic earnings per common share	$	0.62	$	0.69	$	0.17	$	0.20	$	0.45	$	0.49
Diluted earnings per common share	$	0.61	$	0.68	$	0.17	$	0.20	$	0.45	$	0.48
Diluted-weighted average number of common shares outstanding	748		751		750		753		746		749



	For the Six Months Ended June 30, 2016				For the Three Months Ended March 31, 2016
(Amounts in millions)	As reported		As adjusted		As reported		As adjusted
Condensed consolidated statements of cash flows:
Net cash provided by operating activities	$	788	$	840	$	309	$	337
Net cash provided by financing activities	$	798	$	746	$	1,807	$	1,779



	As of June 30, 2016				As of March 31, 2016
(Amounts in millions)	As reported		As adjusted		As reported		As adjusted
Condensed consolidated balance sheets:
Additional paid-in capital	$	10,425	$	10,374	$	10,343	$	10,316
Retained earnings	$	4,366	$	4,417	$	4,239	$	4,266

Given our retrospective application of the presentation requirements for our condensed consolidated statement of cash flows related to excess tax benefits, our net cash provided by operating activities and net cash used in financing activities increased $33 million for the nine months ended September 30, 2015. The other provisions of the standard did not have a material impact on our financial statements.

Statement of Cash Flows

In August 2016, the FASB issued new guidance related to the classification of certain cash items in the statement of cash flows. The new standard requires, among other things, that cash payments for debt prepayment or debt extinguishment costs should be classified as cash outflows for financing activities, as opposed to operating activities as is required under existing guidance. We elected to early adopt this standard in the current period and applied it retrospectively. The adoption of this standard did not have a material impact on our condensed consolidated statement of cash flows.

Recent accounting pronouncements not yet adopted

Revenue recognition

In May 2014, the FASB issued new accounting guidance related to revenue recognition. The new standard will replace all current U.S. GAAP guidance on this topic and eliminate all industry-specific guidance. The new revenue recognition standard provides a unified model to determine when and how revenue is recognized. The core principle is that a company should recognize revenue upon the transfer of promised goods or services to customers in an amount that reflects the consideration for which the entity expects to be entitled in exchange for those goods or services. This guidance will be effective for fiscal years and interim periods within those years beginning after December 15, 2017, and can be applied either retrospectively to each period presented or as a cumulative-effect adjustment as of the date of adoption. We are evaluating the adoption method as well as the impact of this new accounting guidance on our financial statements. While we are currently evaluating the method of adoption and the impact of the new revenue standard on our consolidated financial statements and related disclosures, we believe the adoption of the new revenue recognition standard may have a significant impact on the accounting for our sales of our games with significant online functionality for which we do not have vendor-specific-objective-evidence ("VSOE") for unspecified future updates and ongoing online services provided. Under the current accounting standards, VSOE for undelivered elements is required. This requirement is eliminated under the new standard. Accordingly, we may be required to recognize as revenue a portion of the sales price upon delivery of the software, as compared to the current requirement of recognizing the entire sales price ratably over an estimated offering period. While we are still currently evaluating the impact of the new standard, the impact of this identified difference in accounting may have a material impact on our consolidated financial statements.

Leases

In February 2016, the FASB issued new guidance related to the accounting for leases. The new standard will replace all current U.S. GAAP guidance on this topic. The new standard, among other things, requires a lessee to classify a lease as either a operating or financing lease and lessees will need to recognize a lease liability and a right-of-use asset for their leases. The liability will be equal to the present value of lease payments. The asset will be based on the liability, subject to adjustment for initial direct costs, lease incentives received and any prepaid lease payments. Operating leases will result in straight-line expense, while finance leases will result in a front-loaded expense pattern. Classification will be based on criteria that are largely similar to those applied in current lease accounting. The standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted. The new standard must be adopted using a modified retrospective transition and will require application of the new guidance at the beginning of the earliest comparative period presented. We are evaluating the impact of this new accounting guidance on our financial statements.

Inventory

In July 2015, the FASB issued new guidance related to the measurement of inventory which requires inventory within the scope of the guidance to be measured at the lower of cost and net realizable value. Net realizable value is defined as the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. The new standard is effective for fiscal years beginning after December 15, 2016 and should be applied prospectively. Early adoption is permitted. We are evaluating the impact, if any, of adopting this new accounting guidance on our financial statements.

Financial Instruments

In January 2016, the FASB issued new guidance related to the recognition and measurement of financial assets and financial liabilities. The new standard, amongst other things, generally requires companies to measure investments in other entities, except those accounted for under the equity method, at fair value and recognize any changes in fair value in net income. The new standard also simplifies the impairment assessment of equity investments without readily determinable fair values. The new standard is effective for fiscal years beginning after December 15, 2017, and the guidance should be applied by means of a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption. The amendments related to equity investments without readily determinable fair values (including disclosure requirements) should be applied prospectively to equity investments that exist as of the date of adoption. We are evaluating the impact of this new accounting guidance on our financial statements.