Annual report pursuant to Section 13 and 15(d)

Summary of Significant Accounting Policies

v3.10.0.1
Summary of Significant Accounting Policies
12 Months Ended
Dec. 31, 2018
Accounting Policies [Abstract]  
Summary of Significant Accounting Policies
Summary of Significant Accounting Policies
Basis of Presentation
The accompanying consolidated financial statements and footnotes have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and include the accounts of RealPage, Inc. and its wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation.
Effective with the quarter ended September 30, 2018, we changed the presentation of our Consolidated Statements of Operations to add “Amortization of product technologies” and “Amortization of intangible assets” as separate line items within such statements. Amounts shown as amortization of product technologies were previously included within “Cost of revenue”, and amounts shown as amortization of intangible assets were previously included within the “Sales and marketing” operating expense category. We believe this revised presentation helps readers of our financial statements isolate non-cash amortization expenses that arise from our acquisitions and internally developed software.
Certain prior period amounts reported in our consolidated financial statements and notes thereto have been reclassified to conform to the current period’s presentation.
Correction of an Immaterial Error in Previously Issued Financial Statements
In the third quarter of 2018, we identified an error related to the misclassification of amortization expense related to intangible assets on certain acquired technologies, recognized as “Sales and marketing” expense. Such expense should have been recognized as a component of “Cost of revenue”. As a result, our cost of revenue was understated, and our sales and marketing expense was overstated by identical amounts, which also resulted in an overstatement of gross profit and total operating expenses by the same amount for the effected periods. There was no effect on reported revenues, net income, earnings per share, or cash flows. In accordance with Staff Accounting Bulletin (“SAB”) No. 99, Materiality, and SAB No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements, we evaluated the materiality of the error from a qualitative and quantitative perspective and concluded that the effect of the misclassification was not material to our previously issued consolidated financial statements.
We have corrected the presentation of the amortization expense for all prior periods presented in this Form 10-K. The immaterial error correction resulted in an increase of cost of revenue and reduction in sales and marketing expense of $6.9 million and $0.9 million for the years ended December 31, 2017 and 2016, respectively. There was no change in our accounting for amortization expense related to client relationship, non-compete agreements and trade name intangible assets.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make certain estimates and assumptions that affect the amounts reported and disclosed in the financial statements and accompanying notes. Such significant estimates include, but are not limited to, the determination of the allowances against our accounts receivable; useful lives of intangible assets; impairment assessments on long-lived assets (including goodwill); contingent commissions related to the sale of insurance products; fair value of acquired net assets and contingent consideration in connection with business combinations; the nature and timing of satisfaction of performance obligations and related reserves; fair values of stock-based awards; loss contingencies; and the recognition, measurement and valuation of current and deferred income taxes. Actual results could differ from these estimates. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable, the result of which forms the basis for making judgments about the carrying value of assets and liabilities.
Concentration of Credit Risk
Financial instruments that potentially subject us to concentrations of credit risk consist principally of cash and cash equivalents and accounts receivable. Our cash accounts are maintained at various high credit, quality financial institutions and may exceed federally insured limits. We have not experienced any losses in such accounts.
Substantially all of our accounts receivable are derived from clients in the residential rental housing market. Concentrations of credit risk with respect to accounts receivable and revenue are limited due to a large, diverse customer base. We do not require collateral from clients. We maintain an allowance for doubtful accounts based upon the expected collectability of accounts receivable.
No single client accounted for 10% or more of our revenue or accounts receivable for the years ended December 31, 2018, 2017, or 2016.
Segment and Geographic Information
Our chief operating decision maker is our Chief Executive Officer, who reviews financial information on a consolidated basis for purposes of allocating resources and evaluating financial performance. Accordingly, we have determined we operate as a single operating segment.
Principally, all of our revenue for the years ended December 31, 2018, 2017, and 2016 was earned in the United States. Net property, equipment, and software located in the United States amounted to $144.3 million and $140.0 million at December 31, 2018 and 2017, respectively. Net property, equipment, and software located in our international subsidiaries amounted to $9.2 million and $8.4 million at December 31, 2018 and 2017, respectively. Substantially all of the net property, equipment, and software held in our international subsidiaries was located in the Philippines, Spain, and India at both December 31, 2018 and 2017.
Cash, Cash Equivalents and Restricted Cash
We consider all highly liquid investments with an initial maturity of three months or less at the date of purchase to be cash equivalents. The fair value of our cash and cash equivalents approximates carrying value.
Restricted cash consists of cash collected from tenants that will be remitted primarily to our clients.
Accounts Receivable
Accounts receivable primarily represent trade receivables from clients recorded at the invoiced amount, net of allowances, which are based on our historical experience, the aging of our trade receivables, and management judgment.
Trade receivable are written off against the allowance when management determines a balance is uncollectible. During the years ended December 31, 2018, 2017, and 2016, we incurred bad debt expense of $3.7 million, $3.2 million, and $2.4 million, respectively.
Property, Equipment, and Software
Property, equipment, and software are recorded at cost less accumulated depreciation and amortization, which are computed using the straight-line method over the following estimated useful lives:
Data processing and communications equipment
3 - 5 years
Furniture, fixtures, and other equipment
3 - 5 years
Software
3 - 5 years
Leasehold improvements
Shorter of lease term or estimated useful life

Software includes both purchased and internally developed software. Gains and losses from asset disposals are included in the line “General and administrative” in the Consolidated Statements of Operations.
Internally Developed Software
We capitalize certain development costs incurred in connection with software development for our solutions to be marketed to external users. Costs incurred in the preliminary stages of development are expensed as incurred. Once an application has reached the technological feasibility stage, internal and external costs including costs of materials, services, and payroll and payroll-related costs for employees, are capitalized, if direct and incremental, until the software is available for general release to customers. Minor upgrades and enhancements are also expensed as incurred. Costs related to specific upgrades and enhancements when it is probable the expenditures will result in additional functionality are capitalized.
Costs incurred to develop software intended solely for our internal use, such as internal administration and finance and accounting systems, are capitalized during the application development stage. Interest on funds used to finance internally developed software up to the date the asset is ready for its intended use, is capitalized and included in the cost of the asset if the asset is actively under development. Capitalized interest was not significant for any period presented.
Amortization of internally developed software is included in “Amortization of product technologies” in the accompanying Consolidated Statements of Operations.
Impairment of Long-Lived Assets
Tangible long-lived assets held and used are reviewed for impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Factors we consider important that could trigger an impairment review include, but are not limited to, significant under-performance relative to current and historical or projected future operating results, significant changes in the manner of our use of the asset, or significant changes in our overall business and/or product strategies. If circumstances require that a long-lived asset group be tested for possible impairment, determination of recoverability is based on an estimate of the undiscounted cash flows expected to be generated by that long-lived asset or asset group. If the carrying amount of the long-lived asset or asset group is not recoverable on an undiscounted cash flow basis, we would recognize an impairment charge equal to the excess of the carrying value over its fair value.
Business Combinations
We allocate the fair value of the purchase consideration of our acquisitions to the tangible assets acquired, liabilities assumed, and intangible assets acquired based on their estimated fair values. The excess of the fair value of purchase consideration over the fair values of these identifiable assets and liabilities is recorded as goodwill. Purchase consideration includes assets transferred, liabilities assumed, and/or equity interests issued by us, all of which are measured at their fair value as of the date of acquisition. Our business combination transactions may be structured to include a combination of up-front, deferred and contingent payments to be made at specified dates subsequent to the date of acquisition. These payments may include a combination of cash and equity. Deferred and contingent payments are included in the purchase consideration based on their fair value as of the acquisition date. Deferred obligations are generally subject to adjustments specified in the underlying purchase agreement related to the seller’s indemnification obligations. Contingent consideration is an obligation to make future payments to the seller contingent upon the achievement of future operational or financial targets. The fair value of these payments is estimated using a probability weighted discount model based on the achievement of the specified targets.
The valuation of the net assets acquired as well as certain elements of purchase consideration require management to make significant estimates and assumptions, especially with respect to future expected cash flows, useful lives, and discount rates. Management’s estimates of fair value are based upon assumptions believed to be reasonable, but which are inherently uncertain and, as a result, actual results may differ from estimates. During the measurement period, we may record adjustments to the assets acquired and liabilities assumed with a corresponding offset to goodwill. Changes to the fair value of contingent payments is reflected in “General and administrative” costs in the accompanying Consolidated Statements of Operations.
Acquisition costs are expensed as incurred and are included in “General and administrative” in the accompanying Consolidated Statements of Operations. We include the results of operations from acquired businesses in our consolidated financial statements from the effective date of the acquisition.
Goodwill and Indefinite-Lived Intangible Assets
We test goodwill and indefinite-lived intangible assets for impairment separately on an annual basis in the fourth quarter of each year, or more frequently if circumstances indicate that the assets may not be recoverable.
We evaluate impairment of goodwill either by assessing qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount, or by performing a quantitative assessment. If we choose to perform a qualitative assessment and after considering the totality of events or circumstances, we determine it is more likely than not that the fair value of a reporting unit is less than its carrying amount, we would perform a quantitative fair value test. To calculate any potential impairment, we compare the fair value of a reporting unit with its carrying amount, including goodwill. Any excess of the carrying amount of the reporting unit’s goodwill over its fair value is recognized as an impairment loss, and the carrying value of goodwill is written down. For purposes of goodwill impairment testing, we have one reporting unit.
We quantitatively evaluate indefinite-lived intangible assets by estimating the fair value of those assets based on estimated future earnings derived from the assets using the income approach. Assets with indefinite lives that have been determined to be inseparable due to their interchangeable use are grouped into single units of accounting for purposes of testing for impairment. If the carrying amount of an identified intangible asset with an indefinite life exceeds its fair value, we would recognize an impairment loss equal to the excess of carrying value over fair value.
Intangible Assets
Intangible assets with determinable economic lives are carried at cost, less accumulated amortization. Our intangible assets are largely acquired in business combinations and include developed technologies, client relationships, vendor relationships, non-competition agreements and trade names. Intangible assets are amortized over the shorter of the contractual life or the estimated useful life. Intangible assets are amortized on a straight-line basis, except for client relationships which are amortized proportionately to the expected discounted cash flows derived from the asset.
Estimated useful lives for intangible assets consist of the following:
Developed technologies
3 - 7 years
Client relationships
3 - 10 years
Vendor relationships
7 years
Trade names
1 - 7 years
Non-competition agreements
5 - 10 years
Amortization of acquired developed technologies is included in “Amortization of product technologies”, and amortization of acquired client relationships, vendor relationships, non-competition agreements and trade names is included in “Amortization of intangible assets” in the accompanying Consolidated Statements of Operations.
Other Current and Long-Term Liabilities
Accrued expenses and other current liabilities consisted of the following at December 31, 2018 and 2017:
 
 
December 31,
 
 
2018
 
2017
 
 
(in thousands)
Accrued compensation, payroll taxes, and benefits
 
$
29,405

 
$
25,677

Sales tax obligations
 
3,673

 
4,930

Current portion of liabilities related to acquisitions
 
47,173

 
34,430

Lease-related liabilities
 
2,640

 
2,288

Other current liabilities
 
12,591

 
12,054

Total accrued expenses and other current liabilities
 
$
95,482

 
$
79,379


Other long-term liabilities consisted of the following at December 31, 2018 and 2017:
 
 
December 31,
 
 
2018
 
2017
 
 
(in thousands)
Accrued lease liability
 
$
25,207

 
$
27,760

Liabilities related to acquisitions
 
10,969

 
13,000

Other long-term liabilities
 
1,014

 
753

Total other long-term liabilities
 
$
37,190

 
$
41,513

Deferred Revenue
For several of our solutions, we invoice our clients in annual, monthly, or quarterly installments in advance of the commencement of the service period. Deferred revenue is recognized when billings are due or payments are received in advance of revenue recognition from our subscription and other services. Accordingly, the deferred revenue balance does not represent the total contract value of annual subscription agreements.
Revenue Recognition
Revenues are derived from on demand software solutions, professional services and other goods and services. We recognize revenue as we satisfy one or more service obligations under the terms of a contract, generally as control of goods and services are transferred to our clients. Revenue is measured as the amount of consideration we expect to receive in exchange for transferring goods or providing services. We include estimates of variable consideration in revenue to the extent that it is probable that a significant reversal of cumulative revenue will not occur. We estimate and accrue a reserve for credits and other adjustments as a reduction to revenue based on several factors, including past history.
On Demand Revenue
Our on demand revenue consists of license and subscription fees, transaction fees related to certain of our software-enabled value-added services, and commissions derived from our selling certain risk mitigation services.
We generally recognize revenue from subscription fees on a straight-line basis over the access period beginning on the date that we make our service available to the client. Our subscription agreements generally are non-cancellable, have an initial term of one year or longer and are billed either monthly, quarterly or annually in advance. Non-refundable upfront fees billed at the initial order date that are not associated with an upfront service obligation are recognized as revenue on a straight-line basis over the period in which the client is expected to benefit, which we consider to be three years.
We recognize revenue from transaction fees in the month the related services are performed based on the amount we have the right to invoice.
We offer risk mitigation services to our clients by acting as an insurance agent and derive commission revenue from the sale of insurance products to our clients’ residents. The commissions are based upon a percentage of the premium that the insurance company charges to the policyholder and are subject to forfeiture in instances where a policyholder cancels prior to the end of the policy. Our contract with our underwriting partner provides for contingent commissions to be paid to us in accordance with the agreement. Our estimate of contingent commission revenue considers the variable factors identified in the terms of the applicable agreement. We recognize commissions related to these services as earned ratably over the policy term and insurance commission receivable in “Accounts receivable, less allowances”.
Professional and Other Revenue
Professional services and other revenues generally consist of the fees we receive for providing implementation and consulting services, submeter equipment and ongoing maintenance of our existing on premise licenses.
Professional services are billed either on a time and materials basis or on a fixed price basis, and revenue is recognized over time as we perform the obligation. Professional services are typically sold bundled in a contract with other on demand solutions but may be sold separately. Professional service contracts sold separately generally have terms of one year or less. For bundled arrangements, where we account for individual services as a separate performance obligation, the transaction price is allocated between separate services in the bundle based on their relative standalone selling prices.
Other revenues consist primarily of submeter equipment sales that include related installation services. Such sales are considered bundled, and revenue from these bundled sales is recognized in proportion to the number of installed units completed to date as compared to the total contracted number of unites to be provided and installed. For all other equipment sales, we generally recognize revenue when control of the hardware has transferred to our client.
Revenue recognized for on premise software sales generally consists of annual maintenance renewals on existing term or perpetual license, which is recognized ratably over the service period.
Contract with Multiple Performance Obligations
The majority of the contracts we enter into with clients, including multiple contracts entered into at or near the same time with the same client, require us to provide one or more on demand software solutions, professional services and may include equipment. For these contracts, we account for individual performance obligations separately: i) if they are distinct or ii) if the promised obligation represents a series of distinct services that are substantially the same and have the same pattern of transfer to the client. Once we determine the performance obligations, we determine the transaction price, which includes estimating the amount of variable consideration, if any, to be included in the transaction price. For contracts with multiple performance obligations, we allocate the transaction price to the separate performance obligations on a relative standalone selling price basis. The standalone selling prices of our service are estimated using a market assessment approach based on our overall pricing objectives taking into consideration market conditions and other factors including the number of solutions sold, client demographics and the number and types of users within our contracts.
Sales, value add, and other taxes we collect from clients and remit to governmental authorities are excluded from revenues.
Cost of Revenue
Cost of revenue consists primarily of salaries and related personnel expenses of our operations and support personnel, including training and implementation services; expenses related to the operation of our data centers; fees paid to third-party providers; allocations of facilities overhead costs; and depreciation
Sales and Marketing Expenses and Deferred Commissions
Sales and marketing expenses consist primarily of personnel and related costs, including salaries, benefits, bonuses, commissions, travel, and stock-based compensation. Other costs included are marketing and promotional events, our annual user conference, and other online and product marketing costs. We amortize sales commissions that are directly attributable to a contract over an estimated customer benefit period of three years.
Advertising costs are expensed as incurred and totaled $26.4 million, $22.8 million, and $19.4 million for the years ended December 31, 2018, 2017, and 2016, respectively.
Stock-Based Expense
We recognize compensation expense related to stock options and shares of restricted stock based on the estimated fair value of the awards on the date of grant. We generally grant time-based stock options and restricted stock awards, which vest over a specified period of time, and market-based awards, which become eligible to vest only after the achievement of a condition based upon the trading price of our common stock and vest over a specified period of time thereafter. The fair value of employee stock options is estimated on the date of grant using a binomial option pricing model, the Black-Scholes model. The fair value of our market-based restricted stock awards is estimated using a discrete model based on multiple stock price-paths developed through the use of Monte Carlo simulation.
For time-based stock options and restricted stock awards, expense is recognized on a straight-line basis over the requisite service period. Expense associated with market-based awards is recognized over the requisite service period using the graded-vesting attribution method. Share-based compensation is reduced for forfeitures once they occur.
Income Taxes
Income taxes are recorded based on the liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in our consolidated financial statements or tax returns. Deferred tax assets and liabilities are measured using the tax rates that are expected to apply to taxable income for the years in which those tax assets and liabilities are expected to be realized or settled. We recognize the effect of tax rate changes on current and accumulated deferred income taxes in the period in which the rate change was enacted.
Valuation allowances are provided when it is more likely than not that all or a portion of the deferred tax asset will not be realized. The factors used to assess the need for a valuation allowance include historical earnings, our latest forecast of taxable income, and available tax planning strategies that could be implemented to realize the net deferred tax assets.
We may recognize a tax benefit from uncertain tax positions only if it is at least more likely than not that the tax position will be sustained upon examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position are measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon settlement with the taxing authorities.
Fair Value Measurements
We measure our derivative financial instruments and acquisition-related contingent consideration obligations at fair value at each reporting period using a fair value hierarchy. A financial instrument’s classification within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. Three levels of inputs may be used to measure fair value:
Level 1 - Inputs are quoted prices in active markets for identical assets or liabilities.
Level 2 - Inputs are quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable, and market-corroborated inputs which are derived principally from or corroborated by observable market data.
Level 3 - Inputs are derived from valuation techniques in which one or more of the significant inputs or value drivers are unobservable.
The categorization of an asset or liability is based on the inputs described above and does not necessarily correspond to our perceived risk of that asset or liability. Moreover, the methods used by us may produce a fair value calculation that is not indicative of the net realizable value or reflective of future fair values. Furthermore, although we believe our valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments and non-financial assets and liabilities could result in a different fair value measurement at the reporting date.
Certain financial instruments, which may include cash, cash equivalents, restricted cash, accounts receivable, accounts payable and accrued expenses are recorded at their carrying amounts, which approximates their fair values due to their short-term nature.
Recently Adopted Accounting Standards
Accounting Standards Update 2014-09
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers (Topic 606). ASU 2014-09, as amended by certain supplementary ASU’s released in 2016, replaces all current GAAP guidance on this topic and eliminates all industry-specific guidance. The new revenue recognition standard requires the recognition of revenue when promised goods or services are transferred to clients in an amount that reflects the consideration for which the entity expects to be entitled in exchange for those goods or services. ASU 2014-09 also includes Subtopic 340-40, Other Assets and Deferred Costs - Contracts with Customers, which requires the deferral of incremental costs of obtaining a contract with a client. Collectively, we refer to Topic 606 and Subtopic 340-40 as the “new revenue standard” or “ASC 606.”
We adopted the requirements of the new revenue standard on January 1, 2018 using the modified retrospective method and applied the guidance to contracts not substantially completed as of the date of initial application, or open contracts. We recognized the cumulative effect of initially applying the new revenue standard as an adjustment to the opening balance of retained earnings at the beginning of 2018. Comparative information from prior year periods has not been restated and continues to be reported under the accounting standards in effect for those periods. The cumulative effects of the changes made to our consolidated January 1, 2018 balance sheet for the adoption of the new revenue standard were as follows:
 
Balance at
December 31, 2017
 
Adjustments due
to ASU 2014-09
 
Balance at
January 1, 2018
 
(in thousands)
Assets
 
 
 
 
 
Accounts receivable, less allowances
$
124,505

 
$
(7,925
)
 
$
116,580

Other current assets
$
6,622

 
$
2,771

 
$
9,393

Deferred tax assets, net
$
44,887

 
$
(780
)
 
$
44,107

Other assets
$
11,010

 
$
4,459

 
$
15,469

Liabilities
 
 
 
 
 
Current portion of deferred revenue
$
116,622

 
$
(3,696
)
 
$
112,926

Stockholders’ Equity
 
 
 
 
 
Accumulated deficit
$
(75,046
)
 
$
2,221

 
$
(72,825
)

Adoption of the new revenue standard resulted in changes to our accounting policies for revenue recognition, certain variable considerations, and commissions expense. The adoption of the new revenue standard did not have a significant effect on our revenue; however, it did have an impact on the timing of when we expense commission costs incurred to obtain a contract and the reserves we establish for variable consideration from credits or other pricing accommodations we provide our clients. We expect the effect of the new revenue standard to be immaterial to our revenue on an ongoing basis. The primary effect to our net income on an ongoing basis relates to the reserve for credit accommodations and deferral of incremental commission costs incurred to obtain new contracts. Under the new revenue standard, we accrue for credit accommodations in our reserve during the month of billing, and credits reduce this reserve when issued. Further, we now initially defer commission costs and amortize these costs to expense over a period of benefit that we have determined to be three years. Deferred commissions were capitalized for open contracts at the date of initial application and are capitalized for new contracts in 2018.
See Note 4 for additional required disclosures related to the impact of adopting the new revenue standard and our accounting for costs to obtain a contract.
Accounting Standards Update 2016-18
In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows - Restricted Cash, which requires entities to show the changes in the total of cash, cash equivalents, restricted cash and restricted cash equivalents in the statement of cash flows. This ASU must be adopted retrospectively.
We adopted ASU 2016-18 effective January 1, 2018. As a result of our adoption, changes in customer deposits held in restricted accounts will result in an increase or reduction in our cash flows from operating activities. Under previous rules, such changes were largely offset by the corresponding change in restricted cash and had a minimal impact on our statement of cash flows. The prior period financial statements included in this filing have been adjusted to reflect the adoption of ASU 2016-18. The effects of those adjustments to the Consolidated Statements of Cash Flows have been summarized in the table below:
 
 
Originally Reported
 
Effect of Change
 
As Adjusted
 
 
(in thousands)
Statement of Cash Flows for the year ended December 31, 2017
 
 
 
 
 
 
Net cash provided by operating activities
 
$
137,327

 
$
2,936

 
$
140,263

Net cash used in investing activities
 
$
(709,274
)
 
$
9,412

 
$
(699,862
)
Cash, cash equivalents and restricted cash at end of period
 
$
69,343

 
$
96,002

 
$
165,345

 
 
 
 
 
 
 
Statement of Cash Flows for the year ended December 31, 2016
 
 
 
 
 
 
Net cash provided by operating activities
 
$
136,216

 
$
(6,767
)
 
$
129,449

Net cash used in investing activities
 
$
(145,141
)
 
$
4,960

 
$
(140,181
)
Cash, cash equivalents and restricted cash at end of period
 
$
104,886

 
$
83,654

 
$
188,540


Accounting Standards Update 2016-01
In January 2016, the FASB issued ASU 2016-01, Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities and ASU 2018-03, Technical Corrections and Improvements to Financial Instruments - Overall (Subtopic 825-10) in February 2018, which provides clarification on certain guidance issued under ASU 2016-01. Among other things, ASU 2016-01 eliminates the cost method of accounting and requires that investments in equity securities that were previously accounted for under the cost method must now be measured at fair value, with changes in fair value recognized in net income. Equity instruments that do not have readily determinable fair values may be measured at cost less impairment, plus or minus changes resulting from observable price changes in orderly transactions for identical or similar investments of the same issuer. This ASU became effective on January 1, 2018. We hold an investment which was accounted for under the cost method of accounting prior to January 1, 2018, which does not have a readily determinable fair value and which has had no observable price change. Therefore, we continue to measure this investment at cost, less any impairment. The adoption of this standard did not have a material impact on our consolidated financial statements.
Recently Issued Accounting Standards
In August 2018, the FASB issued ASU 2018-15, Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract. This ASU aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. ASU 2018-15 is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years, and early adoption is permitted. The amendments in this update will be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption. We are currently evaluating the impact of this ASU on our consolidated financial statements.
In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities, which expands an entity’s ability to apply hedge accounting for nonfinancial and financial risk components and allows for a simplified approach for fair value hedging of interest rate risk. Certain of the amendments in this ASU as they relate to cash flow hedges, eliminate the requirement to separately record hedge ineffectiveness currently in earnings. Instead, the entire change in the fair value of the hedging instrument is recorded in Other Comprehensive Income (“OCI”), and amounts deferred in OCI will be reclassified to earnings in the same income statement line item in which the earnings effect of the hedged item is reported. ASU 2017-12 is effective for annual reporting periods beginning after December 15, 2018, including interim periods within those fiscal years, and early adoption is permitted.
We will adopt this standard effective January 1, 2019 on a modified retrospective basis and will record a cumulative effect adjustment in the opening balance of retained earnings with an offsetting adjustment to other comprehensive income. Further, after adoption, the entire change in the fair value of our interest rate swaps will be recorded in other comprehensive income and reclassified into interest expense as interest payments are made on our variable rate debt. The changes in the ASU will not have a material impact on our consolidated financial statements.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The amendments in this ASU replace the incurred loss impairment methodology in current 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. ASU 2016-13 is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted in fiscal years beginning after December 15, 2018. The amendments in this ASU are to be applied through a cumulative-effect adjustment to retained earnings as of the first reporting period in which the ASU is effective. We have not yet selected a transition date and are currently evaluating the impact of adopting ASU 2016-13 on our consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The new guidance requires lessees to recognize assets and liabilities arising from all leases with a lease term of more than 12 months, including those classified as operating leases under previous accounting guidance. It also requires disclosure of key information about leasing arrangements to increase transparency and comparability among organizations.
ASU 2016-02 is effective for interim and annual periods beginning after December 15, 2018. In July 2018, the FASB issued ASU 2018-11, Leases - Targeted Improvements, which provides for an optional transition method to allow companies to initially account for the impact of the adoption with a cumulative-effect adjustment to the opening balance of retained earnings on January 1, 2019. This eliminates the requirement to restate amounts presented prior to January 1, 2019. We will adopt the standard effective January 1, 2019 under the optional transition method, or modified retrospective approach. We have elected the package of practical expedient available under the transition provisions including: (i) not reassessing whether expired or existing contracts contain leases, (ii) not reassessing lease classification, and (iii) not revaluing initial direct costs for existing leases. We also plan to elect the practical expedient which will allow aggregation of non-lease components with the related lease components when evaluating accounting treatment. We have made an accounting policy election to exempt leases with an initial term of twelve months or less from balance sheet recognition. Instead, short-term leases will be expensed over the lease term.
The adoption of this standard will materially impact our balance sheet by recognizing a right of use asset and lease liability between approximately $75.0 million and $100.0 million. The value of lease assets and lease liabilities recognized under ASU 2016-02 will change with the passage of time and from changes in specific facts and circumstances effecting the nature and timing of our contractual lease arrangements from period to period. As a result, the lease assets and lease liabilities that are recognized as of January 1, 2019 may not be indicative of amounts to be recognized in future periods. Adoption of this ASU will modify our ongoing analysis and disclosures of lease agreements. We have implemented a new lease software solution and continue to modify our business processes and internal controls as part of the adoption.