NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Policies)

12 Months Ended

Dec. 31, 2015

NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The Consolidated Financial Statements include the accounts of Epiq and its wholly-owned subsidiaries. Intercompany transactions and balances have been eliminated in consolidation. Certain prior year amounts have been reclassified to conform to the current year presentation. See "Recently Issued Accounting Standards" included in Note 1 and Note 10 to the Consolidated Financial Statements for additional information.

Use of Estimates

The preparation of the Consolidated Financial Statements in conformity with accounting principles generally accepted in the United States of America 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. Significant items subject to such estimates include the carrying amount of intangibles, goodwill, and valuation allowances for receivables, contingencies and deferred income tax assets. Actual results can, and often do, differ from those assumed in our estimates.

Revenue Recognition

We have agreements with clients pursuant to which we deliver various services and solutions. Our significant sources of revenue are:

Fees contingent upon the month-to-month delivery of services defined by client contracts, such as claims processing, claims reconciliation, professional services, call center support, controlled disbursement services, project management, collection and forensic services, consulting services, document review services and conversion of data into an organized, searchable electronic database. The amount we earn varies based primarily on the size and complexity of the engagement, the number of hours of professional services provided and the number of documents or volume of data processed or reviewed.

Legal noticing services to parties of interest in bankruptcy, class action, federal regulatory action, data breach and other administrative matters including direct notification and media campaign and advertising management.

Data hosting fees and volume-based fees.

Fixed-fees related to our managed service eDiscovery solutions.

Monitoring and noticing fees earned based on monthly or on-demand requests for information provided through our AACER® software product.

Deposit-based fees earned based on a percentage of Chapter 7 assets placed on deposit with designated financial institutions by our trustee clients. Our trustee clients do not directly pay fees in connection with Chapter 7 related services. The fees earned are based on assets placed on deposit by our trustee clients and may vary based on fluctuations in short-term interest rates and changes in service fees assessed on such deposits.

Reimbursed expenses, primarily related to postage on mailing services and other pass-through expenses.

Multiple Element Arrangements

We have arrangements with clients pursuant to which we provide multiple elements of services that are billed based on unit prices and volumes for which we have identified each deliverable service element. Based on our evaluation of each element, we have determined that each element delivered has stand-alone value to our clients because we or other vendors sell such services separately from any other services and deliverables. However, we don't sell these services on a stand-alone basis in sufficient volumes to establish evidence of fair value. Therefore, we obtain objective and reliable evidence of the fair value of each element based on third-party evidence of similar services or, for elements where third-party evidence cannot be established, the best estimate of sales price has been used. Our arrangements do not include general rights of return. Accordingly, each of the service elements in our multiple element case and document management arrangements qualifies as a separate unit of accounting. We allocate revenue to the various units of accounting in our arrangements based on the fair value or best estimated selling price of each unit of accounting, which is generally consistent with the stated prices in our arrangements. In instances when revenue recognition is deferred, we utilize the relative selling price method to calculate the revenue recognized for each period.

We recognize revenue for each service deliverable when the following criteria are satisfied:

we have evidence of an arrangement,

the services are rendered,

our fee becomes fixed and determinable, and

collectability is reasonably assured.

Payments received in advance of satisfaction of the related revenue recognition criteria are recognized as a client deposit until all revenue recognition criteria have been satisfied.

Reimbursements

We have revenue related to reimbursable expenses, primarily postage. Reimbursable postage and other reimbursable expenses are recorded gross in the Consolidated Statements of Operations as "Reimbursable expenses" in the revenue and operating expenses sections.

We expense client contract acquisition, origination, and set-up costs as incurred.

Share-Based Compensation

We account for all share-based compensation in accordance with fair value accounting principles. Under this method, compensation expense is measured at the grant date fair value net of estimated forfeitures, and is recognized on a straight-line basis over the requisite service period. The grant date fair value of stock option awards is estimated using a Black-Scholes option-pricing model. The grant date fair value of nonvested share awards is the quoted market value of Epiq's common stock on the grant date.

Income Taxes

The liability method is used in accounting for income taxes. Deferred tax assets and liabilities are recorded for temporary differences between the tax basis of assets and liabilities and their reported amounts in the consolidated financial statements using the statutory tax rates in effect for the year in which the differences are expected to reverse. The effect on deferred tax assets and liabilities of a change in tax rates is recorded in the results of operations in the period that includes the enactment date under the law.

Deferred income tax assets are evaluated quarterly to determine if valuation allowances are required or should be adjusted. A valuation allowance is provided when, in the opinion of management, it is more likely than not that some portion or all of a deferred tax asset will not be realized. Realization of the deferred tax assets is dependent on our ability to generate sufficient future taxable income and, if necessary, execution of our tax planning strategies. In the event we determine that sufficient future taxable income, taking into consideration tax planning strategies, may not generate sufficient taxable income to fully realize net deferred tax assets, we may be required to establish or increase valuation allowances by a charge to income tax expense in the period such a determination is made.

We record uncertain tax positions on the basis of a two-step process whereby: (1) we determine whether it is more likely than not that the tax positions will be sustained based on the technical merits of the position; and (2) for those tax positions that meet the more likely than not recognition, we recognize the largest amount of tax benefit that is greater than 50% likely to be realized upon ultimate settlement with the related tax authority. We record interest and penalties on uncertain tax positions in income tax expense (benefit). Application of this guidance requires numerous estimates based on available information. We consider many factors when evaluating and estimating our tax positions and tax benefits, and our recognized tax positions and tax benefits may not accurately anticipate actual outcomes. As we obtain additional information, we may need to periodically adjust our recognized tax positions and tax benefits.

Cash and Cash Equivalents

Cash and cash equivalents include cash on hand and in banks and all liquid investments with original maturities of three months or less at the time of purchase.

Accounts Receivable

Accounts receivable are recorded at the invoiced amount and are non-interest bearing. We maintain an allowance for doubtful accounts to reserve for potentially uncollectible receivables. We review accounts receivable to identify amounts due from clients which are past due to identify specific clients with known disputes or collectability issues. In determining the amount of the reserve, we make judgments about the creditworthiness of significant clients based on ongoing credit evaluations. At December 31, 2015 and 2014, the allowance for doubtful accounts was $1.0 million and $4.0 million, respectively.

Property and Equipment, Software and Leasehold Improvements

Property and equipment, including leasehold improvements and internal use, are stated at cost and depreciated or amortized on a straight-line basis over the estimated useful life of each asset or, for leasehold improvements, the lesser of the lease term or useful life.

Depreciation expense is computed on the straight-line method over estimated useful lives as follows:

Buildings and building improvements		30 years
Leasehold improvements		Life of lease or asset life if less
Furniture and fixtures		5 - 7 years
Computer equipment and purchased software		2 - 5 years
Transportation equipment		3 - 7 years
Operations equipment		3 - 7 years

Property and equipment are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amounts of assets may not be recoverable. We first evaluate recoverability of assets to be held and used by comparing the carrying amount of the asset to undiscounted expected future cash flows to be generated by the assets. If such assets are considered to be impaired, the impairment loss recognized is the amount by which the carrying amount exceeds the fair value.

Internally Developed Software

Certain internal software development costs incurred in the creation of computer software products for sale, lease or otherwise to be marketed are capitalized once technological feasibility has been established. Capitalized costs are amortized; beginning in the period the product is available for general release, based on the ratio of current revenue to current and estimated future revenue for each product with minimum annual amortization equal to the straight-line amortization over the remaining estimated economic life of the product.

Certain internal software development costs incurred in the creation of computer software products for internal use are capitalized when the preliminary project phase is complete and when management, with the relevant authority, authorizes and commits funding to the project and it is probable the project will be completed and the software will be used to perform the function intended. Capitalized costs are amortized, beginning in the period each module or component of the product is ready for its intended use, on a straight-line basis over the estimated economic life of the product. Internally developed software is tested annually for impairment, or more often if an event occurs or circumstances change that would more likely than not reduce the net realizable value to less than its unamortized capitalized cost.

Intangible Assets

Identifiable intangible assets, resulting from various business acquisitions, consist of client relationships, agreements not to compete, technology, and trade names. We amortize the identifiable intangible assets over their estimated economic benefit period, generally from three to ten years. These definite-lived intangible assets are reviewed for impairment whenever events or changes in circumstances have indicated that the carrying amount of these assets might not be recoverable. If we were to determine that events and circumstances warrant a change to the estimate of an identifiable intangible asset's remaining useful life, then the remaining carrying amount of the identifiable intangible asset would be amortized prospectively over that revised remaining useful life. Additionally, information resulting from other events and circumstances may indicate that the carrying value of one or more identifiable intangible assets is not recoverable which would result in recognition of an impairment charge. During the second quarter of 2015, we recorded a noncash impairment charge of $1.0 million related to acquired technology assets resulting from the sale of Minus –10 Software, LLC ("Minus 10"). See Note 4 to the Consolidated Financial Statement for additional information.

Goodwill

Goodwill represents the excess of the purchase price over the fair value of the net identifiable assets acquired in business combinations. We assess goodwill for impairment on at least an annual basis, as of July 31, at a reporting unit level and have identified our operating segments (Technology and Bankruptcy and Settlement Administration) as our reporting units for purposes of testing for goodwill impairment.

When performing our goodwill impairment testing, the fair values of our reporting units are determined based on valuation techniques using the best available information, primarily discounted cash flow projections (income approach) and market multiples derived from a set of competitors or companies with comparable market characteristics (market approach). We make significant assumptions and estimates, which utilize Level 3 measures, about the extent and timing of future cash flows, which are dependent on internal forecasts, estimation of the long-term rate of growth for our business, estimation of the useful life over which cash flows will occur, and determination of our weighted average cost of capital. In addition, financial and credit market volatility directly impacts our fair value measurement through our weighted average cost of capital, used to determine our discount rate, and through our stock price, used to determine our market capitalization. Changes in these estimates and assumptions could materially affect the determination of fair value and goodwill impairment for each reporting unit, and there can be no assurance that we will realize that value. As of July 31, 2015, which is the date of our most recent impairment test, the fair value of each of our reporting units was in excess of the carrying value of the reporting unit.

Goodwill is assessed between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value. These events or circumstances could include a significant change in the business climate, a change in strategic direction, legal factors, operating performance indicators, a change in the competitive environment, the sale or disposition of a significant portion of a reporting unit, or future economic factors such as unfavorable changes in our stock price and market capitalization or unfavorable changes in the estimated future discounted cash flows of our reporting units. During the second quarter of 2015, we recorded a goodwill impairment charge of $0.2 million resulting from the sale of Minus 10. See Note 4 to the Consolidated Financial Statement for additional information.

As of December 31, 2015, there have been no events since our last annual test to indicate that it is more likely than not that the recorded goodwill balance had become impaired. Our consolidated goodwill totaled $477.5 million as of December 31, 2015.

Debt Issuance Costs

Incremental, third-party costs related to establishing debt arrangements are capitalized and amortized based on the terms of the related debt. The unamortized costs related to our senior secured revolving credit facility are included in "Other long-term assets" on our Consolidated Balance Sheets. All other unamortized debt issuance costs are included as a direct deduction from "Long-term obligations" on our Consolidated Balance Sheets. Amortization of debt issuance costs is included in "Interest expense" on our Consolidated Statements of Operations.

Derivative Instruments

We may use derivative financial instruments as part of our risk management strategy to reduce our interest rate exposure. We do not enter into derivative financial instruments for speculative or trading purposes. Derivatives are measured at fair value and recorded on the balance sheet as either assets or liabilities. Changes in the fair value of derivatives are recorded either through current earnings or comprehensive income (loss), depending on hedge designation. Gains and losses on derivative instruments classified as cash flow hedges are reported in comprehensive income and are reclassified into earnings in the periods in which earnings are impacted by the variability of the cash flow of the hedged item. The ineffective portion of all hedge transactions is recognized in current period earnings.

Foreign Currency Translation

Local currencies are the functional currencies for our operating subsidiaries. Accordingly, assets and liabilities of these subsidiaries are translated at the rate of exchange at the balance sheet date. Adjustments from the translation process are part of accumulated other comprehensive income (loss) and are included as a separate component of equity. Income and expense items of significant value are translated as of the date of the transactions for these subsidiaries; however, day to day operational transactions are translated at average rates of exchange. As of December 31, 2015 and 2014, cumulative translation adjustments included in "Accumulated other comprehensive loss" in the Consolidated Balance Sheets were $5.2 million and $3.0 million, respectively.

Business Combinations

Accounting for the acquisition of a business requires us to determine the fair value of all assets acquired, including identifiable intangible assets, liabilities assumed, and contingent consideration obligations. The purchase consideration of the acquisition is allocated to these assets and liabilities in amounts equal to the estimated fair value of each asset and liability, and any remaining purchase consideration is classified as goodwill. This allocation process requires the use of estimates and assumptions, including quoted market prices and estimates of future cash flows to be generated by the acquired assets. We include the results of operations of the businesses that we acquire as of the respective dates of acquisition. Acquisition-related costs for potential and completed acquisitions are expensed, as incurred, and are included in "Other operating income (expense)" on our Consolidated Statements of Operations.

Contingencies

We may be involved in various legal proceedings from time to time in the ordinary course of business. Except for income tax contingencies, we record accruals for contingencies to the extent that we conclude their occurrence is probable and the related liability can be reasonably estimated. We record anticipated recoveries under existing insurance contracts when we are assured of recovery. Many factors are considered when making these assessments, including the progress of the case, opinions or views of legal counsel, prior case law, our experience or the experience of other companies with similar cases, and our intent on how to respond. Litigation and other contingencies are inherently unpredictable and excessive damage awards do occur. As such, these assessments can involve a series of complex judgments about future events and can rely heavily on estimates and assumptions.

Recently Issued Accounting Standards

In February 2016, the Financial Accounting Standards Board (the "FASB") issued accounting standard update ("ASU") No. 2016-02, Leases (Topic 842). This new lease guidance requires that an entity should recognize assets and liabilities for leases with a maximum possible term of more than 12 months. A lessee would recognize a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the leased asset (the underlying asset) for the lease term. Leases would be classified as either Type A leases (generally today's capital leases) or Type B leases (generally today's operating leases). For certain leases of assets other than property (for example, equipment, aircraft, cars, trucks), a lessee would classify the lease as a Type A lease and would do the following: (1) recognize a right-of-use asset and a lease liability, initially measured at the present value of lease payments and (2) recognize the unwinding of the discount on the lease liability as interest separately from the amortization of the right-of-use asset. For certain leases of property (that is, land and/or a building or part of a building), a lessee would classify the lease as a Type B lease and would do the following: (1) recognize a right-of-use asset and a lease liability, initially measured at the present value of lease payments and (2) recognize a single lease cost, combining the unwinding of the discount on the lease liability with the amortization of the right-of-use asset, on a straight-line basis. This guidance also provides accounting updates with respect a lessor accounting under a lease arrangement. Historically, we have not engaged in the business of leasing assets to third parties. This new lease guidance is effective for Epiq beginning in the first quarter of fiscal 2019. Entities have the option of using either a full retrospective or a modified approach (cumulative effect adjustment in period of adoption) to adopt the new guidance. Early adoption is permitted for all entities. We are currently assessing the full impact of this new guidance on our consolidated financial position, results of operations and cash flows, however, due to the magnitude of our operating leases and related rent expense, we expect the adoption of this accounting guidance to have a material effect on our consolidated financial statements.

In November 2015, the FASB issued ASU No. 2015-17, Income Taxes (Topic 740): "Balance Sheet Classification of Deferred Taxes". Under this guidance, entities are required to present deferred tax assets and deferred tax liabilities as noncurrent in a classified balance sheet. This guidance is effective for annual and interim periods beginning after December 15, 2016, with early adoption permitted. Entities are permitted to adopt this guidance either prospectively or retrospectively. We elected to early adopt this guidance retrospectively in the fourth quarter of 2015, and as a result, $4.6 million of current deferred tax assets on our December 31, 2014 Consolidated Balance Sheet was reclassified from current assets to a direct reduction of long-term deferred income tax liabilities. The adoption of this guidance did not affect our results of operations or cash flows.

In April 2015, the FASB issued ASU No. 2015-03, Interest—Imputation of Interest: "Simplifying the Presentation of Debt Issuance Costs" (ASU 2015-03), which 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. Since ASU 2015-03 does not address deferred issuance costs for line-of-credit arrangements, in August 2015, the FASB issued ASU No. 2015-15, "Interest—Imputation of Interest: Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements" (ASU 2015-15). ASU 2015-15 allows an entity to defer debt issuance costs associated with line-of-credit arrangements, including arrangements with no outstanding borrowings, classify them as an asset, and amortize them over the term of the arrangements. ASU 2015-03 and ASU 2015-15 are effective retrospectively for annual and interim periods beginning after December 15, 2015, with early adoption permitted. We elected to early adopt this guidance in the fourth quarter of 2015, and as a result, reclassification of debt issuance costs related to our senior secured term loan resulted in reductions in "Other long-term assets" and "Long-term obligations" of $5.3 million and $5.7 million as of December 31, 2015 and 2014, respectively. The adoption of this guidance did not affect our results of operations or cash flows.

In September 2015, the FASB issued ASU No. 2015-16, Business Combinations (Topic 805): "Simplifying the Accounting for Measurement-Period Adjustments", which eliminates the requirement for an acquirer in a business combination to account for measurement-period adjustments retrospectively. Under this guidance, acquirers must recognize measurement-period adjustments in the period in which they determine the amounts, including the effect on earnings of any amounts they would have recorded in previous periods if the accounting had been completed at the acquisition date. This guidance is effective for annual and interim periods beginning after December 15, 2015, with early adoption permitted. We elected to early adopt this guidance in the third quarter of 2015. The adoption of this guidance did not have a material impact on our Consolidated Financial Statements.

In May 2014, the FASB issued ASU No. 2014-09, "Revenue from Contracts with Customers (Topic 606)", which supersedes the revenue recognition requirements in Accounting Standards Codification 605, Revenue Recognition. This new revenue guidance outlines a single comprehensive model for companies to use in accounting for revenue arising from contracts with customers and supersedes most of the current revenue recognition guidance. The new guidance requires that an entity should recognize 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. To achieve this core principle, an entity should apply the following steps: (1) identify the contract with a customer, (2) identify the performance obligations under the contract, (3) determine the transaction price, (4) allocate the transaction price to the performance obligations under the contract and (5) recognize revenue when (or as) the entity satisfies a performance obligation. The new guidance also provides for additional disclosures with respect to revenues and cash flows arising from contracts with customers. This new revenue guidance was going to be effective for Epiq beginning in the first quarter of fiscal 2017. In August 2015, the FASB deferred the effective date by one year. Early adoption as of the original effective date will be permitted. Entities have the option of using either a full retrospective or a modified approach (cumulative effect adjustment in period of adoption) to adopt the new guidance. We are currently assessing the impact of this new revenue guidance on our consolidated financial position, results of operations and cash flows and will adopt this new guidance effective January 1, 2018.