Basis of Consolidation: The accompanying unaudited condensed consolidated financial statements include the operations of CBIZ, Inc. and all of its wholly-owned subsidiaries (“CBIZ”, the “Company”, “we”, “us”, or “our”), after elimination of all intercompany balances and transactions. These condensed consolidated financial statements do not reflect the operations or accounts of variable interest entities as the impact is not material to the financial condition, results of operations or cash flows of CBIZ.

Use of Estimates: The preparation of condensed consolidated financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the amounts reported and disclosed in the financial statements and the accompanying notes. Changes in circumstances could cause actual results to differ materially from these estimates.

New Accounting Pronouncements

The Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) is the sole source of authoritative GAAP other than the SEC issued rules and regulations that apply only to SEC registrants. The FASB issues an accounting standard to communicate changes to the FASB codification. We assess and review the impact of all accounting standards. Any accounting standards not listed below were reviewed and determined to be either not applicable or are not expected to have a material impact on the consolidated financial statements of the Company.

Accounting Standards Adopted in 2018

Modification Accounting for Share-Based Payment Awards: Effective January 1, 2018, we adopted ASU No. 2017-09, “Compensation – Stock Compensation (Topic 718) – Scope of Modification Accounting.” The new standard clarifies when a change to the terms or conditions of a share-based payment award must be accounted for as a modification. Modification accounting is required if the fair value, vesting condition or the classification of the award is not the same immediately before and after a change to the terms and conditions of the award. We typically do not change either the terms or conditions of share-based payment awards once they are granted; therefore, the adoption of this new guidance had no impact on our consolidated financial statements.

Restricted Cash - Statement of Cash Flows: Effective January 1, 2018, we adopted ASU No. 2016-18, “Statement of Cash Flows (Topic 230).” The new standard 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. Therefore, restricted cash 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. When restricted cash is presented separately from cash and cash equivalents on the balance sheet, a reconciliation is required between the amounts presented on the statement of cash flows and the balance sheet, as well as a disclosure of information about the nature of the restrictions. The adoption of this new standard resulted in a $0.4 million decrease in net cash provided by operating activities and a $4.2 million increase in net cash provided by operating activities for the nine months ended September 30, 2018 and 2017, respectively.

Restricted cash consists of funds held by us in relation to our capital and investment advisory services as those funds are restricted in accordance with applicable Financial Industry Regulatory Authority regulations. Restricted cash also consists of funds on deposit from clients in connection with the pass-through of insurance premiums to the carrier with the related liability for these funds recorded in “Accounts payable” in the accompanying Consolidated Balance Sheets.

The following table provides a reconciliation of cash, cash equivalents and restricted cash as reported in the accompanying Consolidated Balance Sheets that sum to the total of the same such amount shown in the accompanying Consolidated Statements of Cash Flows (in thousands):

	September 30,		September 30,
	2018		2017
Cash and cash equivalents	$	3,493	$	1,278
Restricted cash		32,551		32,104
Total cash, cash equivalents and restricted cash	$	36,044	$	33,382

Statement of Cash Flows: Effective January 1, 2018, we adopted ASU No. 2016-15, “Statement of Cash Flows (Topic 230) – Classification of Certain Cash Receipts and Cash Payments.” The new standard provides guidance on eight specific cash flow issues. The application of this guidance did not have a material effect on the presentation of our Statement of Cash Flows.

Revenue from Contracts with Customers: Effective January 1, 2018, we adopted Topic 606 using the modified retrospective transition method. We recognized the cumulative effect of initially applying the new standard as an adjustment directly to the opening balance of “Retained earnings” at January 1, 2018. The comparative information has not been restated and continues to be reported under the legacy standard.

We evaluate our revenue contracts with customers based on the five-step model under Topic 606, pursuant to which we: (i) identify the contract with the customer; (ii) identify the performance obligation in the contract; (iii) determine the contract price; (iv) allocate the transaction price; and (v) recognize revenue when as each performance obligation is satisfied. If we determine that a contract with enforceable rights and obligations does not exist, revenues are deferred until all criteria for an enforceable contract are met.

Revenue recognition was consistent under both the legacy standard and Topic 606 for the majority of our revenue streams, with the exception of two business units within our Benefits and Insurance Services practice group. The revenue recognition policies in our Benefits and Insurance Services practice group have been modified under the new standard as follows.

•

In our Property and Casualty business unit, commission revenue under agency billing arrangements (pursuant to which we bill the insured, collect the funds and remit the premium to the insurance carrier less our commissions) was previously recognized as of the later of the effective date of the insurance policy or the date billed to the customer. We now recognize the commission revenue on the effective date of the insurance policy.

Also in our Property and Casualty business unit, commission revenue under direct billing arrangements (pursuant to which the insurance carrier bills the insured directly and remits the commissions to us) was previously recognized when the data necessary from the carriers was available, whereas now we recognize the commission revenue on the effective date of the insurance policy.

•

In our Retirement Plan Services business unit, under certain defined benefit administration arrangements we charge new clients an initial, non-refundable, set-up fee as part of a multi-year service agreement. Previously, these fees were recognized over the initial set up period, whereas now we defer the set-up fees and associated costs and recognize them over the life of the contract or the expected customer relationship, whichever is longer.

The cumulative effect of the changes made to our consolidated January 1, 2018 balance sheet was as follows (in thousands):

	Balance at		Adjustments		Balance at
	December 31,		due to		January 1,
Balance Sheet	2017		Topic 606		2018
ASSETS
Accounts receivable, net	$	188,300	$	9,446	$	197,746
Other current assets		259,873		80		259,953
Other non-current assets		728,058		728		728,786
Total assets	$	1,176,231	$	10,254	$	1,186,485
LIABILITIES
Accounts payable		51,375		6,281		57,656
Accrued personnel costs		45,264		595		45,859
Other current liabilities		237,607		113		237,720
Deferred income taxes, net		3,339		631		3,970
Other non-current liabilities		307,767		1,012		308,779
Total liabilities		645,352		8,632		653,984
STOCKHOLDERS' EQUITY
Retained earnings		345,302		1,622		346,924
Other stockholders' equity		185,577		—		185,577
Total stockholders' equity		530,879		1,622		532,501
Total liabilities and stockholders' equity	$	1,176,231	$	10,254	$	1,186,485

The following tables summarize the impact of adopting Topic 606 on our consolidated financial statements for the periods indicated below (in thousands):

						Balances without
September 30, 2018 Balance Sheet	As reported		Adjustments			adoption of Topic 606
ASSETS
Accounts receivable, net	$	234,906	$	(15,097	)	$	219,809
Other current assets		188,931		(80	)		188,851
Other non-current assets		766,019		(667	)		765,352
Total assets	$	1,189,856	$	(15,844	)	$	1,174,012
LIABILITIES
Accounts payable	$	57,764	$	(10,276	)	$	47,488
Accrued personnel costs		55,038		(575	)		54,463
Other current liabilities		168,995		(114	)		168,881
Deferred income taxes, net		5,636		(1,038	)		4,598
Other non-current liabilities		300,508		(925	)		299,583
Total liabilities		587,941		(12,928	)		575,013
STOCKHOLDERS' EQUITY
Retained earnings		409,467		(2,916	)		406,551
Other stockholders' equity		192,448		—			192,448
Total shareholders' equity		601,915		(2,916	)		598,999
Total liabilities and stockholders' equity	$	1,189,856	$	(15,844	)	$	1,174,012

							Balances without
Three Months Ended September 30, 2018 Income Statement	As reported			Adjustments			adoption of Topic 606
Revenue	$	224,249		$	(763	)	$	223,486
Operating expenses		198,607			(14	)		198,593
Gross margin		25,642			(749	)		24,893
Corporate general and administrative expenses		10,279			-			10,279
Operating income		15,363			(749	)		14,614
Other (expense) income:
Interest expense		(1,614	)		—			(1,614	)
Gain on sale of operations, net		—			—			—
Other income, net		3,143			—			3,143
Total other expense, net		1,529			—			1,529
Income from continuing operations before income tax expense		16,892			(749	)		16,143
Income tax expense		3,297			(168	)		3,129
Income from continuing operations		13,595			(581	)		13,014
Loss from discontinued operations, net of tax		(9	)		—			(9	)
Net income	$	13,586		$	(581	)	$	13,005

							Balances without
Nine Months Ended September 30, 2018 Income Statement	As reported			Adjustments			adoption of Topic 606
Revenue	$	722,980		$	(1,744	)	$	721,236
Operating expenses		608,459			(43	)		608,416
Gross margin		114,521			(1,701	)		112,820
Corporate general and administrative expenses		30,300			—			30,300
Operating income		84,221			(1,701	)		82,520
Other (expense) income:
Interest expense		(5,211	)		—			(5,211	)
Gain on sale of operations, net		663			—			663
Other income, net		2,544			—			2,544
Total other expense, net		(2,004	)		—			(2,004	)
Income from continuing operations before income tax expense		82,217			(1,701	)		80,516
Income tax expense		19,691			(407	)		19,284
Income from continuing operations		62,526			(1,294	)		61,232
Gain from discontinued operations, net of tax		17			-			17
Net income	$	62,543		$	(1,294	)	$	61,249

							Balances without
Nine Months Ended September 30, 2018 Cash Flow Statement	As reported			Adjustments			adoption of Topic 606
Cash flows from operating activities:
Net income	$	62,543		$	(1,294	)	$	61,249
Adjustments to reconcile net income to net cash provided by operating activities:		27,884			—			27,884
Changes in assets and liabilities, net of acquisitions and divestitures:								—
Accounts receivable, net		(38,937	)		5,651			(33,286	)
Other assets		(3,474	)		(61	)		(3,535	)
Accounts payable		108			(3,995	)		(3,887	)
Accrued personnel costs		8,986			20			9,006
Other liabilities		(3,134	)		(321	)		(3,455	)
Other		9,458			—			9,458
Operating cash flows provide by continuing operations		63,434			—			63,434
Operating cash flows used in discontinued operations		(162	)		—			(162	)
Net cash provided by operating activities		63,272			—			63,272
Net provided by investing activities		42,201			—			42,201
Net cash used in financing activities		(102,838	)		—			(102,838	)
Net increase in cash, cash equivalents and restricted cash		2,635			—			2,635
Cash, cash equivalents and restricted cash at beginning of year		33,409			—			33,409
Cash, cash equivalents and restricted cash at end of period	$	36,044			—		$	36,044

Accounting Standards Not Yet Adopted

Internal-Use Software: In August 2018, the FASB issued ASU 2018-15, "Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40)," which aligns the requirements for capitalizing implementation costs incurred in a service contract hosting arrangement with those of developing or obtaining internal-use software. This standard is effective for interim and annual reporting periods beginning after December 15, 2019, and early adoption is permitted. We are currently evaluating the impact the new standard will have on our consolidated financial position and results of operations.

Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income: In February 2018, the FASB issued ASU No. 2018-02, “Income Statement – Reporting Comprehensive Income (Topic 220)” which allows the reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act of 2017. The new standard is effective for fiscal years beginning after December 15, 2018, including interim periods, with early adoption permitted. We do not expect this guidance to have a material impact on our consolidated financial position or results of operations.

Derivatives and Hedging: In August 2017, the FASB issued ASU No. 2017-12, “Derivatives and Hedging (Topic 815) - Targeted Improvements to Accounting for Hedging Activities.” The new standard improves and simplifies accounting rules for hedge accounting to better present the economic results of an entity’s risk management activities in its financial statements and improves the disclosures of hedging arrangements. Additionally, it simplifies the hedge documentation and effectiveness assessment requirements. The updated guidance is effective for us beginning January 1, 2019. We do not expect this guidance to have a material impact on our consolidated financial position or results of operations.

Leases: In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842)” (the “New Lease Standard”) which amends the current ASC Topic 840, “Leases.” The guidance requires lessees to recognize a right-of-use asset and a lease liability for all leases (with the exception of short-term leases) on their balance sheet at the commencement date and recognize expenses on their income statement similar to the current ASC Topic 840, Leases. The New Lease Standard is effective for fiscal years and interim periods beginning after December 15, 2018. In addition, the FASB issued ASU No. 2018-11, “Leases Targeted Improvements” which provides a package of practical expedients for entities to apply upon adoption. We will adopt this standard effective January 1, 2019.

We are making progress on our project plan to implement the New Lease Standard, including assessing and evaluating our portfolio of active real estate leases and surveying our business units for other leases. Additionally, we are utilizing a lease accounting software solution for both real estate and other leases to support the new reporting requirements. We are currently analyzing key lease agreement terms to extract and load into the lease accounting software solution. Although we are still finalizing our evaluation of the impact of the New Lease Standard, we expect it to have a material effect on our consolidated balance sheet. Based on the future minimum payments under non-cancellable operating leases as of September 30, 2018, we would expect to record approximately $200 million of lease related assets and liabilities, discounted to fair value, on our consolidated balance sheet with no impact on our equity. The New Lease Standard is not expected to have a material impact on our results of operations, our liquidity or our debt covenant compliance under our current credit agreements.