REVENUE RECOGNITION

On December 31, 2017, we adopted the new accounting standard ASU No. 2014-09, Revenue from Contracts with Customers (ASC 606) using the modified retrospective method to contracts that were not completed as of December 30, 2017. We recognized the cumulative effect of initially applying the new revenue standard as an adjustment to the opening balance of retained earnings.

The adoption of ASC 606 represents a change in accounting principle that will also provide readers with enhanced revenue recognition disclosures. Revenue is recognized when the control of the promised goods or services are transferred to our customers, in an amount that reflects the consideration that we expect to receive in exchange for those goods or services.

A performance obligation is a promise in a contract to transfer a distinct good or service to the customer and represents the unit of account in ASC 606. A contracts transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. The company’s contracts can have multiple performance obligations or just a single performance obligation. For contracts with multiple performance obligations, the contracts transaction price is allocated to each performance obligation using the company’s best estimate of the standalone selling price of each distinct good or service in the contract.

Within the Commercial Foodservice Equipment and Residential Foodservice Equipment Groups, the estimated standalone selling price of equipment is based on observable prices. Within the Food Processing Equipment Group, the company estimates the standalone selling price based on expected cost to manufacture the good or complete the service plus an appropriate profit margin.

Control may pass to the customer over time or at a point in time. In general, the Commercial Foodservice Equipment and Residential Foodservice Equipment Groups recognize revenue at the point in time control transfers to their customers based on contractual shipping terms. Revenue from equipment sold under our long-term contracts within the Food Processing Equipment group is recognized over time as the equipment is manufactured and assembled. Installation services provided in connection with the delivery of the equipment are also generally recognized as those services are rendered. Over time transfer of control is measured using an appropriate input measure (e.g., costs incurred or direct labor hours incurred in relation to total estimate). These measures include forecasts based on the best information available and therefore reflect the company's judgment to faithfully depict the transfer of the goods.

Contract Estimates

Accounting for long-term contracts within the Food Processing Equipment group involves the use of various techniques to estimate total contract revenue and costs. For the company’s long-term contracts, estimated profit for the equipment performance obligations is recognized as the equipment is manufactured and assembled. Profit on the equipment performance obligations is estimated as the difference between the total estimated revenue and expected costs to complete a contract. Contract cost estimates are based on labor productivity and availability, the complexity of the work to be performed; the cost and availability of materials and labor, and the performance of subcontractors.

Contracts within the Commercial Foodservice and Residential Foodservice Equipment groups may contain variable consideration in the form of volume rebate programs. The company’s estimate of variable consideration is based on its experience with similarly situated customers using the portfolio approach.

Practical Expedients and Policy Elections

The company has taken advantage of the following practical expedients:


•	The company does not disclose information about remaining performance obligations that have original expected durations of one year or less.


•	The company generally expenses sales commissions when incurred because the amortization period would have been less than one year. These costs are recorded within selling, general and administrative expenses.


•	As the company’s standard payment terms are less than one year, the company does not assess whether a contract has a significant financing component.

The company has made the following accounting policy elections permitted by ASC 606:


•	The company treats shipping and handling activities performed after the customer obtains control of the good as a contract fulfillment activity.


•	Sales, use and value added taxes assessed by governmental authorities are excluded from the measurement of the transaction price within the company’s contracts with its customers.

Adoption of ASC 606

As a result of the adoption of ASC 606, the company has changed its accounting policy for revenue recognition as detailed below.

Equipment

Under the company’s historical accounting policies, revenue under long-term sales contracts within the Food Processing Equipment Group was recognized using the percentage of completion method. Upon adoption, a number of contracts that were not completed as of December 31, 2017 did not meet the requirements for recognition of revenue over time under ASC 606. As such the revenue is deferred and recognized at a point in time.

Installation Services

Under the company’s historical accounting policies, the company used the completed contract method for installation services associated with equipment sold within the Food Processing Equipment Group. Under ASC 606, the Company recognizes revenue from installation services over the period the services are rendered.

Product Maintenance

These services are generally recognized on a straight-line basis, because the customer simultaneously receives and consumes the benefit as we perform the services.

The cumulative effect of the changes made to our December 30, 2017 Consolidated Balance Sheet for the adoption of ASC 606 using the modified retrospective method to contracts that were not completed as of December 30, 2017 were as follows (in thousands):



	Balance at December 30, 2017 (as reported)		Adjustments due to ASC 606			Balance at December 30, 2017 (as adjusted)
Balance Sheet
Assets
Accounts receivable	$	328,421	$	(122	)	$	328,299
Inventories, net	424,639		14,993			439,632
Prepaid expenses and other	55,427		(4,018		)	51,409
Long-term deferred tax assets	44,565		1,319			45,884

Liabilities & Stockholders' Equity
Accrued expenses	$	322,171	$	16,557		$	338,728
Retained earnings	1,697,618		(4,405		)	1,693,213

In accordance with the requirements of ASC 606, the adoption of ASC 606 had no impact on cash provided by operating activities within the company's Consolidated Statement of Cash Flows. The impact of adoption on our Consolidated Statement of Earnings and Consolidated Balance Sheet are as follows (in thousands):



	Twelve Months Ended December 29, 2018
	As Reported		Balances without ASC 606		Effect of Change
Net sales	$	2,722,931	$	2,702,357	$	20,574
Cost of sales	1,718,791		1,703,488		15,303
Provision for income taxes	106,361		105,132		1,229
Net earnings	$	317,152	$	313,110	$	4,042

Basic earnings per share	$	5.71	$	5.63
Diluted earnings per share	$	5.70	$	5.63



	Balance as of December 29, 2018
	As Reported		Balances without ASC 606		Effect of Change
Assets
Inventories, net	$	521,810	$	520,631	$	1,179
Prepaid expenses and other	50,940		51,315		(375		)

Liabilities
Accrued expenses	$	367,446	$	368,128	$	(682	)
Long-term deferred tax liability	113,896		113,841		55

Equity
Retained earnings	$	2,009,233	$	2,009,411	$	(178	)

Disaggregation of Revenue

We disaggregate our net sales by reportable operating segment and geographical location as we believe it best depicts how the nature, timing and uncertainty of our net sales and cash flows are affected by economic factors. In general, the Commercial Foodservice Equipment and Residential Foodservice Equipment Groups recognize revenue at the point in time control transfers to their customers based on contractual shipping terms. Revenue from equipment sold under our long-term contracts within the Food Processing Equipment group is recognized over time as the equipment is manufactured and assembled. The following table summarizes our net sales by reportable operating segment and geographical location (in thousands):



	Commercial Foodservice		Food Processing		Residential Kitchen		Total
Twelve Months Ended December 29, 2018
United States and Canada	$	1,176,006	$	263,743	$	366,679	$	1,806,428
Asia	180,409		36,578		7,155		224,142
Europe and Middle East	315,935		64,666		221,126		601,727
Latin America	57,464		24,607		8,563		90,634
Total	$	1,729,814	$	389,594	$	603,523	$	2,722,931

Twelve Months Ended December 30, 2017
United States and Canada	$	968,483	$	256,739	$	344,204	$	1,569,426
Asia	144,702		25,175		8,099		177,976
Europe and Middle East	226,697		42,473		240,456		509,626
Latin America	42,226		28,330		7,958		78,514
Total	$	1,382,108	$	352,717	$	600,717	$	2,335,542

Twelve Months Ended December 31, 2016
United States and Canada	$	886,597	$	247,636	$	367,957	$	1,502,190
Asia	140,964		24,254		9,234		174,452
Europe and Middle East	196,433		54,688		274,160		525,281
Latin America	42,961		15,657		7,311		65,929
Total	$	1,266,955	$	342,235	$	658,662	$	2,267,852

Contract Balances

Contract assets primarily relate to the company's right to consideration for work completed but not billed at the reporting date and are recorded in prepaid expenses and other in the Consolidated Balance Sheet. Contract assets are transferred to receivables when the right to consideration becomes unconditional. Accounts receivable are not considered contract assets under the new revenue standard as contract assets are conditioned upon the company's future satisfaction of a performance obligation. Accounts receivable, in contracts, are unconditional rights to consideration.

Contract liabilities relate to advance consideration received from customers for which revenue has not been recognized. Current contract liabilities are recorded in accrued expenses in the Consolidated Balance Sheet. Non-current contract liabilities are recorded in other non-current liabilities in the Consolidated Balance Sheet. Contract liabilities are reduced when the associated revenue from the contract is recognized.

The following table provides information about contract assets and contract liabilities from contracts with customers (in thousands):



	As of December 29, 2018		At Adoption
Contract assets	$	14,048	$	16,753
Contract liabilities	$	57,913	$	47,647
Non-current contract liabilities	$	12,170	$	1,859

During the twelve months period ended December 29, 2018, the company reclassified $14.2 million to receivable which was included in the contract asset balance at the beginning of the period. During the twelve months period ended December 29, 2018, the company recognized revenue of $47.5 million which was included in the contract liability balance at the beginning of the period. Additions to contract liabilities representing amounts billed to clients in excess of revenue recognized to date were $57.0 million during the twelve months period ended December 29, 2018. The increase in the non-current contract liabilities primarily relates to companies acquired during the twelve months period ended December 29, 2018, and relates principally to contracts for maintenance services. Substantially all of the company's outstanding performance obligations will be satisfied within 12 to 36 months. There were no contract asset impairments during twelve months period ended December 29, 2018.