New Accounting Standards

In September 2017, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2017-13, "Revenue Recognition (Topic 605), Revenue from Contracts with Customers (Topic 606), Leases (Topic 840), and Leases (Topic 842)". This update clarifies the definition of a public business entity for the application of the new revenue recognition and leasing standards. This update did not have an impact on our assessment of these standards, discussed below in connection with ASU 2014-09, and will not impact our implementation strategies. The revenue standard is effective for annual periods beginning after December 15, 2017, including interim periods within those fiscal years, and the leasing standard is effective for annual periods beginning after December 15, 2018, including interim periods within those fiscal years.

In May 2017, the FASB issued ASU 2017-09, "Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting." This update clarifies which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. For public business entities, the amendments in this update are effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The Company did not identify any modifications to its existing awards and therefore has concluded that there is no impact to its consolidated financial statements.

In January 2017, the FASB issued ASU 2017-04, “Intangibles - Goodwill and Other (Topic 350).” The standard simplifies the subsequent measurement of goodwill by removing the second step of the two-step impairment test. The amendment requires an entity to perform its annual or interim goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An impairment charge should be recognized for the amount by which the carrying amount exceeds the reporting unit's fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. The amendment should be applied on a prospective basis. The standard is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company has adopted this standard as of October 1, 2017.

In January 2017, the FASB issued ASU 2017-01, “Business Combinations: Clarifying the Definition of a Business (Topic 805).” This update clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. For public business entities, the amendments in this update are effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The Company has adopted this standard as of December 31, 2017.

In March 2016, the FASB issued ASU 2016-09 “Improvements to Employee Share-Based Payment Accounting (Topic 718).” The standard simplifies several aspects of accounting for share-based payment transactions, including the accounting for income taxes, forfeitures and statutory withholding requirements, as well as classification in the statement of cash flows. The standard is effective for annual periods beginning after December 15, 2016, including interim periods within those fiscal years. The Company adopted this standard as of January 1, 2017. The primary impact of this standard is the income tax effects of awards recognized when the awards are vested or settled is now reflected in the statement of cash flows as part of net income from operating activities.

In February 2016, the FASB issued ASU 2016-02 “Leases (Topic 842).” The new standard requires lessees to recognize lease assets (right of use) and lease obligations (lease liability) for leases previously classified as operating leases under generally accepted accounting principles on the balance sheet for leases with terms in excess of 12 months. The standard is effective for annual periods beginning after December 15, 2018, including interim periods within those fiscal years. The Company is in the process of assessing its contractual commitments and arrangements with respect to the required presentation and disclosure under the new lease standard and its impact. Remaining implementation matters include completing the gap analysis between current requirements and the new leasing standard, establishing new policies, procedures and controls and quantifying any adjustments upon adoption.

In November 2015, the FASB issued ASU 2015-17 “Income Taxes (Topic 740)." The new standard requires that deferred tax assets and liabilities be classified as noncurrent on a classified balance sheet. The Company adopted this standard in the first quarter of 2017 on a prospective basis.

In May 2014, the FASB issued ASU 2014-09 “Revenue from Contracts with Customers (Topic 606)", herein referred to as the "New Standard." The amendment applies a new five-step revenue recognition model to be used in recognizing revenues associated with customer contracts. The amendment requires disclosure sufficient to enable readers of financial statements to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers, including qualitative and quantitative disclosures, significant judgments and changes in judgments and assets recognized from the costs to obtain or fulfill the contract. The standard’s effective date was originally for fiscal years beginning after December 15, 2016, including interim periods within that reporting period. On April 1, 2015, the FASB voted to defer the effective date by one year to December 15, 2017 and interim periods within annual reporting periods beginning after December 15, 2017. The new revenue standard permits companies to either apply the requirements retrospectively to all prior periods presented or apply the requirements in the year of adoption through a cumulative adjustment. The Company has engaged a third-party expert to review our significant revenue streams and identify the required changes to our revenue recognition policies. Based on our existing customer contracts and relationships, we do not expect the implementation of the new guidance to have a material impact on our consolidated financial statements upon adoption. The Company’s evaluation of the impact could change if we enter into new revenue arrangements in the future or interpretations of the new guidance further evolve.

While not expected to be material, the more significant changes to the Company’s revenue recognition policies are in the following areas:

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Products: Revenues for products sold in Brazil not under the percentage-of-completion method are primarily recognized upon receipt of approval to invoice the customer due to formal customer acceptance procedures. Under the New Standard, the Company assessed the customer acceptance procedures and determined that Dril-Quip and the customer can objectively determine that the agreed-upon specifications of the product have been met and control transfers to the customer upon delivery of the product. As a result, under the New Standard, revenue is recognized at a point in time upon transfer of control of the product.


•	Services:

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Technical Advisory - Similar to products, revenues for technical advisory services provided in Brazil are currently recognized upon receipt of approval to invoice due to formal customer acceptance procedures. Under the New Standard, the Company assessed the customer acceptance procedures and determined that Dril-Quip and the customer can objectively determine that the agreed-upon specifications of the services have been met and control transfers to the customer as the services are provided. As a result, revenue under the New Standard is recognized over time as the services are being performed.

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Rework and reconditioning -Revenues for rework and reconditioning services provided in Brazil are currently recognized upon receipt of approval to invoice due to formal customer acceptance procedures. Under the New Standard, the Company assessed the customer acceptance procedures and determined that Dril-Quip and the customer can objectively determine that the agreed-upon specifications of the services have been met and control transfers to the customer as the services are provided. As a result, revenue under the New Standard is recognized over time as the services are being performed.

Revenues for rework and reconditioning services are primarily recognized at a point in time upon completion of the services. Under the New Standard, revenue from such services is expected to be recognized over time as the services are provided and control is transferred to the customer.


•	Fines and liquidated damages are currently expensed when incurred. Under the New Standard, fines and liquidated damages are estimated at contract inception and at each subsequent reporting period and the total transaction price is reduced accordingly (i.e. impacts revenue instead of expense).

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The Company uses local agents in certain countries and may pay the local agents a commission related to individual contracts. Currently, these commissions are expensed as incurred. However, under the New Standard, in situations in which the local agent is determined to be the principal in the relationship (i.e. they are the customer), the commission is consideration payable to a customer, and therefore reduces the total transaction price (i.e. impacts revenue instead of expense). In situations in which the local agent is determined not to be the principal in the relationship, the commission will be assessed to determine if it is a cost to obtain a contract and will be capitalized accordingly.

We are continuing our assessment of potential changes to our disclosures under the New Standard. The Company currently expects to adopt the standard using the modified retrospective method, which requires us to report revenue under the New Standard for 2018 and future periods, and recognize a cumulative effect adjustment in retained earnings for differences resulting from application of the New Standard to contracts that were not substantially complete at January 1, 2018. We have considered the new expanded disclosures associated with the new revenue standard for the first quarter of 2018. We will provide additional disclosures regarding any material differences in reported financial statement line items in 2018 when compared to the amounts what would have been reported under legacy accounting guidance.