Description of the Business and Summary of Significant Accounting Policies

Description of the business

We are a leading developer of technology-based products and services and associated content for the worldwide gaming, lottery and interactive gaming industries. Our portfolio of revenue-generating activities primarily includes supplying gaming machines and game content, casino-management systems, and table game products and services to licensed gaming entities; providing instant and draw-based lottery games, lottery systems, and lottery content and services to lottery operators; and providing interactive gaming and social casino solutions to retail consumers and regulated gaming entities as applicable. We report our operations in three business segments—Gaming, Lottery and Interactive.

Basis of presentation and principles of consolidation

The accompanying consolidated financial statements have been prepared in accordance with U.S. GAAP. The accompanying consolidated financial statements include the accounts of SGC and its wholly owned subsidiaries, and those subsidiaries in which we have a controlling financial interest. Investments in other entities in which we do not have a controlling financial interest but we exert significant influence are accounted for in our consolidated financial statements using the equity method of accounting or in the case of our investment in NYX, the fair value method of accounting. All intercompany balances and transactions have been eliminated in consolidation.

Use of estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions 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 revenues and expenses during the reporting period. Actual results could differ from those estimates.

Significant Accounting Policies

Additional accounting policy disclosures are provided within the applicable Notes.

Cash and cash equivalents

Cash and cash equivalents include all cash balances and highly liquid investments with an original maturity of three months or less. We place our temporary cash investments with high credit quality financial institutions. At times, such investments in U.S. accounts may be in excess of the Federal Deposit Insurance Corporation insurance limit.

Restricted cash

We are required by gaming regulations to maintain sufficient reserves in restricted cash accounts to be used for the purpose of funding payments to WAP jackpot winners. Restricted cash balances are based primarily on the jackpot meters displayed to slot players or for previously won jackpots and vary by jurisdiction. Compliance with maintaining adequate restricted cash balances and complying with appropriate investment guidelines for jackpot funding is periodically reported to gaming authorities.

Minimum guarantees

We enter into long-term license agreements with third parties in which we are obligated to pay a minimum guaranteed amount of royalties, typically annually over the life of the contract. We account for the minimum guaranteed obligations within accrued and other long-term liabilities at the onset of the license arrangement and record a corresponding licensed asset within intangible assets, net. The licensed intangible assets related to the minimum guaranteed obligations are amortized over the term of the license agreement with the amortization expense recorded in D&A. The long-term liability related to the minimum guaranteed obligations is reduced as royalty payments are made as required under the license agreement. We assess the recoverability of license agreements whenever events arise or circumstances change that indicate the carrying value of the licensed asset may not be recoverable. Recoverability of the licensed asset and the amount of impairment, if any, are determined using our policy for intangible assets with finite useful lives.

The following are our total minimum guaranteed obligations for the periods presented:



	As of December 31,
	2017		2016
Accrued liabilities	$	47.4	$	48.7
Other long-term liabilities	117.6		146.8
Total minimum guarantee obligations	$	165.0	$	195.5
Weighted average remaining term (in years)	3.0		5.0

The following are our remaining expected future payments of minimum guarantee obligations:



	Year Ending December 31,
	2018	2019	2020	2021	2022	2023
Expected future payments	$47.4	$45.5	$44.9	$13.4	$13.8	$—

Other assets

We capitalize debt issuance costs associated with long-term line-of-credit arrangements and amortize such amounts ratably over the term of the arrangement as an adjustment to interest expense.

We assess the recoverability of our other long-term assets whenever events arise or circumstances change that indicate the carrying value of the asset may not be recoverable.

Advertising costs

The cost of advertising is expensed as incurred and totaled $82.6 million, $71.3 million and $41.1 million in 2017, 2016 and 2015, respectively.

R&D

R&D relates primarily to software product development costs and is expensed as incurred until technological feasibility has been established. Employee related costs associated with product development are included in R&D.

Foreign currency translation

We have significant operations where the local currency is the functional currency, including our operations in the U.K., Europe, Australia and Canada. Assets and liabilities of foreign operations are translated at period-end rates of exchange and results of operations are translated at the average rates of exchange for the period. Gains or losses resulting from translating the foreign currency financial statements are accumulated as a separate component of accumulated other comprehensive loss in stockholders' deficit. Gains or losses resulting from foreign currency transactions are included in other (expense) income, net. See Note 20.

Comprehensive loss

We include and separately classify in comprehensive loss unrealized gains and losses from our foreign currency translation adjustments, certain gains or losses associated with pension or other post-retirement benefits, including prior service costs or credits and transition assets or obligations, and the effective portion of derivative financial instruments designated as hedging instruments.

New accounting guidance - Adopted

The FASB issued ASU No. 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting in 2016. The amended guidance is intended to simplify several aspects of accounting for share-based payment award transactions, including income tax consequences, accounting for forfeitures, classification of awards as either equity or liabilities and classification in the statement of cash flows. ASU 2016-09 has separate transition guidance for each element of the new standard. We adopted the guidance at the beginning of the first quarter of 2017. The adoption of this guidance did not result in a net cumulative-effect adjustment to accumulated loss, as the previously unrecognized excess tax benefit of $10.1 million was fully offset by an increase in the valuation allowance as of December 31, 2016. The excess tax benefit recognized in our provision for income taxes for the year ended December 31, 2017 was immaterial. In addition, we elected to continue to account for forfeitures by estimating the expected forfeitures over the course of a vesting period.

The FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash in 2016. ASU 2016-18 requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents and amounts generally described as restricted cash or restricted cash equivalents. As a result, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. We adopted the guidance retrospectively at the beginning of the first quarter of 2017. The adoption of this guidance resulted in increases to the cash, cash equivalents and restricted cash beginning-of-period and end-of period line item totaling $38.1 million and $41.8 million, respectively, which now includes restricted cash, and a $3.7 million decrease in net cash used in investing activities for the year ended December 31, 2016 and also resulted in increases to the cash, cash equivalents and restricted cash beginning-of-period and end-of period line item totaling $44.0 million and $38.1 million, respectively, which now includes restricted cash, and a $5.9 million increase in net cash used in investing activities for the year ended December 31, 2015.

The FASB issued ASU No. 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment in 2017. ASU 2017-04 simplifies the subsequent measurement of goodwill by eliminating Step 2 from the goodwill impairment test. Under the new amendments, an entity should perform its annual or interim goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity must recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit's fair value. We adopted this guidance prospectively at the beginning of the first quarter of 2017, which is expected to simplify our goodwill impairment testing, if testing necessitates an impairment charge.

New accounting guidance - Not yet adopted

The FASB issued ASU No. 2014-09, Revenue from Contracts with Customers in 2014. ASU 2014-09 combined with all subsequent amendments (collectively ASC 606) provides guidance outlining a single comprehensive revenue model in accounting for revenue from contracts with customers. ASC 606 supersedes all existing revenue recognition guidance, including industry-specific guidance, and replaces it with a five-step revenue model with a core principle that "an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services." This guidance is effective for fiscal years beginning after December 15, 2017 and interim periods within those fiscal years. We will adopt this guidance at the beginning of the first quarter of 2018, using a modified retrospective application approach.

We have completed our assessment of the anticipated impact of adopting this guidance in revenue recognition for our business segments. The following table summarizes the anticipated impact on our consolidated financial statements based on our assessment:



Business Segment	Revenue Type	Adoption Impact
Gaming	Gaming operations	- We anticipate the following impact on the net amount of revenue for WAP jackpot payments, which will no longer be treated as an expense but rather as a reduction to revenue: WAP jackpot expense of $23.2 million, $29.8 million and $38.1 million for the years ended December 31, 2017, 2016 and 2015, respectively, instead would have been recognized as a reduction to revenue. - We do not anticipate a material impact on timing or amount of revenue, other than the WAP impact disclosed above.

	Gaming machine sales	- We do not anticipate a material impact on timing or amount of revenue.

	Gaming systems	- We anticipate impact on timing of revenue recognition primarily related to certain hardware products and professional services, for which timing of revenue recognition might accelerate. We do not anticipate this will result in a material impact on our consolidated financial statements.

	Table products and other	- We do not anticipate a material impact on timing or amount of revenue. We do not anticipate a material impact on timing or amount of revenue on our U.K. gaming operations, which includes gaming operations, machine sales and to a lesser extent gaming system revenue streams.

Lottery	Instant products under POS	- We anticipate there may be a material impact on the timing and amount of revenue for our instant products revenues generated under POS arrangements. Timing of recognition- we currently recognize revenue under POS arrangements when such amounts become fixed or determinable, which is when retail sales occur. Under ASC 606, we have concluded that control transfers to the lottery authorities when the lotteries have taken delivery of shipments of instant products. This will accelerate revenue when compared to the current timing of recognition. Adoption impact- upon adoption of ASC 606, the amount that we expect to receive from our lottery customers for inventory that remains unsold through retail sales will be recognized as an adjustment (both the revenue and cost of such instant products) to retained earnings. As of December 31, 2017, approximately $52.0 million of revenue with approximately $33.0 million of an inventory carrying value related to instant products remained in the distribution channel (either at lottery warehouses or at their retail agent locations). The related revenue and cost of revenue will never be recognized in the income statement because those tickets had not been sold by lottery retailers before the adoption of ASC 606. Under ASC 606, these amounts will instead be recognized directly to retained earnings as opposed to being recognized as future revenue and cost of revenue upon the occurrence of retail sales. Future impact- because of the timing change described above, revenues and associated operating income may be materially impacted depending on timing of shipments of instant products. We also expect that future revenues under POS arrangements could be much more volatile than we have experienced under current accounting. However, because the timing of future shipments is not known, we cannot estimate the impact on future revenues and associated operating income.

	Lottery - other	- We anticipate other immaterial impacts on timing and amount of revenue related to our other instant product and lottery systems arrangements which we anticipate would result in a shift in the timing of revenue recognition from 2017 to 2018 by less than $10 million in the aggregate.

Interactive	All	- We do not anticipate a material impact on timing or amount of revenue.

We anticipate that we will record a net increase to opening accumulated loss of approximately $10.0 million (exclusive of income tax impact) as of January 1, 2018 due to the cumulative impact of adopting ASC 606, with the impact primarily related to our Lottery segment instant product sales as described above. We are still evaluating the impact of applying ASC 606 for various revenue types of recently acquired NYX.

Additionally, ASC 606 will significantly increase revenue disclosure requirements; however many of these newly required quantitative disclosures, including disaggregation of revenue and discussion of deferred revenue are included in Note 3.

The FASB issued ASU No. 2016-02, Leases (Topic 842) in 2016. The amended guidance is intended to increase transparency and comparability among organizations by recognizing lease assets and liabilities on the balance sheet and disclosing key information about leasing arrangements. The adoption of this guidance is expected to result in a significant portion of our operating leases, where we are the lessee, to be recognized on our Consolidated Balance Sheet. The guidance requires lessees and lessors to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach. This guidance is effective for fiscal years beginning after December 15, 2018 and interim periods within those fiscal years, with earlier adoption permitted. We are currently evaluating the impact of adopting this guidance.

The FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326) in 2016. The new guidance replaces the incurred loss impairment methodology in current U.S. GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. For trade and other receivables, loans and other financial instruments, we will be required to use a forward-looking expected loss model rather than the incurred loss model for recognizing credit losses which reflects losses that are probable. The new guidance will be effective for us beginning January 1, 2020, with early adoption permitted beginning January 1, 2018. Application of the amendments is through a cumulative-effect adjustment to retained earnings as of the effective date. We are currently evaluating the impact and timing of adopting this guidance.

The FASB issued ASU No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business in 2017. The new guidance clarifies the definition of a business in order to allow for the evaluation of whether transactions should be accounted for as acquisitions or disposals of assets or businesses. The new guidance is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. While we do not expect a material effect on our financial statements by adopting this guidance, its impact will depend on the nature of future M&A activities, which we cannot predict.

The FASB issued ASU No. 2017-07, Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost in 2017. The new guidance requires that an employer report the service cost component in the same line item or items as other compensation costs arising from services rendered by the pertinent employees during the period. The other components of net benefit cost are required to be presented in the income statement separately from the service cost component and outside a subtotal of operating income, if one is presented. We are also required to describe which line items are used to present the other components of net benefit cost if such financial statement line items are separately presented; otherwise we must disclose the line items in which such costs are presented. We will adopt the new guidance beginning January 1, 2018 on a full retrospective basis, including interim periods within those fiscal years. The adoption of this guidance will result in other components of net benefit costs to be presented within interest expense, which were previously included primarily within the SG&A line item. Other components of net benefit costs for the years ended December 31, 2017, 2016 and 2015 were $(0.3) million, $(1.4) million and $(0.5) million, respectively.

The FASB issued ASU No. 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities in 2017. The new guidance makes improvements to simplify the application of hedge accounting guidance while also creating more transparency for results presented on the face of the financial statements and footnotes. The new guidance is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, with early adoption permitted. We expect to early adopt this guidance during the first quarter of 2018, which is not expected to have a material effect on our financial statements.

We do not expect that any other recently issued accounting guidance will have a significant effect on our consolidated financial statements.