(2) Recent Accounting Standards

Revenue from contracts with customers

The Company adopted ASU 2014-09 effective as of January 1, 2018 and adjusted prior period consolidated financial statements to reflect full retrospective adoption. In adopting ASU 2014-09, the Company has made the following significant changes in accounting principles:

(i)

Timing of revenue recognition for term license sales. Under ASU 2014-09, the Company now recognizes product licenses revenue from term licenses upon delivery of the software. Previously, this revenue was recognized over the term of the arrangement.

(ii)

Timing of revenue recognition for sales to channel partners. Under ASU 2014-09, the Company now recognizes revenue from sales made to OEMs when control of the products transfers to the OEM, less adjustments for returns or price protection. Previously, this revenue was not recognized until the product was sold by the OEM to the end user. Revenue from sales made to resellers continues to be recognized when control of the product has transferred to the end user.

(iii)

Allocating the transaction price to the performance obligations in the contract. Under ASU 2014-09, the Company will allocate the transaction price to the various performance obligations in the contract based on their relative SSP. Except for SSP of product support, the Company’s methodologies for estimating SSP of its various performance obligations are generally consistent with the Company’s previous methodologies used to establish vendor specific objective evidence of fair value on multiple element arrangements. The SSP of product support will result in a difference in the allocation of the transaction price between product support and product license performance obligations. The impact from SSP-based allocations was not material to the Company’s prior or current period financial statements and is not expected to be material in future periods.

(iv)

Material rights. The Company’s contracts with customers may include options to acquire additional goods and services at a discount. Under ASU 2014-09, certain of these options may be considered material rights if sold below SSP and would be treated as separate performance obligations and included in the allocation of the transaction price. Previously, none of the Company’s options were considered material rights. The impact from material rights was not material to the Company’s prior or current period financial statements and is not expected to be material in future periods.

(v)

Presentation of accounts receivable, contract assets, and contract liabilities (deferred revenue). Under ASU 2014-09, the Company’s rights to consideration are presented separately depending on whether those rights are conditional (“contract assets”) or unconditional (“accounts receivable”). See Note 4, Contract Balances, to the Consolidated Financial Statements for further discussion on balance sheet presentation. Under ASU 2014-09, the Company cannot net accounts receivable with contract liabilities (“deferred revenue”) and the Company no longer offsets its accounts receivable and deferred revenue balances for unpaid items that are included in the deferred revenue balance. Previously, this offsetting of accounts receivable and deferred revenue balances for unpaid amounts was applied in the Company’s prior period financial statements.

(vi)

Deferral of incremental direct costs to obtaining a contract with a customer. Under ASU 2014-09, the Company now capitalizes certain variable compensation payable to its sales force and subsequently amortizes the capitalized costs over a period of time that is consistent with the transfer of the related good or service to the customer, which the Company has determined to be three years. Previously, the Company elected to expense these incremental direct costs as incurred.

Upon adoption of ASU 2014-09, the Company recorded a cumulative $13.0 million increase to its 2016 beginning retained earnings balance, offset by a $12.9 million decrease in gross deferred revenues, a $5.2 million decrease in deferred tax assets, net of deferred tax liabilities, a $4.4 million increase in other non-current assets, and a $0.9 million increase in other current assets.

The following line items as of December 31, 2017 and for the three and nine months ended September 30, 2017 have been adjusted in the Consolidated Financial Statements to reflect the adoption of ASU 2014-09:

	December 31, 2017
Consolidated Balance Sheet	As Reported (audited)			Effect of the Adoption of ASU 2014-09 (unaudited)			As Adjusted (unaudited)
Accounts receivable, net	$	69,500		$	95,864		$	165,364
Prepaid expenses and other current assets		18,002			1,178			19,180
Deposits and other assets		2,868			4,543			7,411
Deferred tax assets, net		13,391			(4,094	)		9,297
Deferred revenue and advance payments		112,649			86,085			198,734
Deferred revenue and advance payments, non-current		10,181			(3,781	)		6,400
Accumulated other comprehensive loss		(5,968	)		309			(5,659	)
Retained earnings		511,755			14,878			526,633

	Three Months Ended September 30, 2017
Consolidated Statement of Operations:	As Reported (unaudited)		Effect of the Adoption of ASU 2014-09 (unaudited)			As Adjusted (unaudited)
Product licenses revenue	$	21,553	$	803		$	22,356
Product support revenues		72,886		(5	)		72,881
Sales and marketing expenses		41,806		199			42,005
Provision for income taxes		2,197		339			2,536
Net income		17,924		260			18,184
Diluted earnings per share		1.56		0.02			1.58

	Nine Months Ended September 30, 2017
Consolidated Statement of Operations:	As Reported (unaudited)		Effect of the Adoption of ASU 2014-09 (unaudited)			As Adjusted (unaudited)
Product licenses revenue	$	61,683	$	1,047		$	62,730
Product support revenues		214,142		17			214,159
Sales and marketing expenses		122,635		578			123,213
Provision for income taxes		8,804		659			9,463
Net income		43,867		(173	)		43,694
Diluted earnings per share		3.79		(0.01	)		3.78

	Three Months Ended September 30, 2017
Consolidated Statement of Comprehensive Income:	As Reported (unaudited)		Effect of the Adoption of ASU 2014-09 (unaudited)		As Adjusted (unaudited)
Net income	$	17,924	$	260	$	18,184
Foreign currency translation adjustment		1,060		60		1,120
Comprehensive income		18,984		320		19,304

	Nine Months Ended September 30, 2017
Consolidated Statement of Comprehensive Income:	As Reported (unaudited)		Effect of the Adoption of ASU 2014-09 (unaudited)			As Adjusted (unaudited)
Net income	$	43,867	$	(173	)	$	43,694
Foreign currency translation adjustment		4,090		335			4,425
Comprehensive income		47,927		162			48,089

	Nine Months Ended September 30, 2017
Consolidated Statement of Cash Flows:	As Reported (unaudited)			Effect of the Adoption of ASU 2014-09 (unaudited)			As Adjusted (unaudited)
Net income	$	43,867		$	(173	)	$	43,694
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		9,838			2,171			12,009
Deferred taxes		(6,214	)		706			(5,508	)
Changes in operating assets and liabilities:
Prepaid expenses and other current assets		(3,954	)		(1,088	)		(5,042	)
Deposits and other assets		(1,280	)		(8	)		(1,288	)
Accrued compensation and employee benefits		(8,845	)		(1,592	)		(10,437	)
Deferred revenue and advance payments		1,156			(16	)		1,140

Intra-entity asset transfers

In October 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory (“ASU 2016-16”), to improve the accounting for income tax effects of intra-entity transfers of assets other than inventory. Under ASU 2016-16, the deferral of the income tax consequences of intra-entity transfers of assets other than inventory is eliminated. Entities will be required to recognize the income tax consequences of intra-entity transfers of assets other than inventory when the transfers occur. The standard requires a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption using a modified retrospective approach. The Company adopted this guidance effective as of January 1, 2018. The adoption of this guidance did not have a material impact on the Company’s consolidated financial position, results of operations, or cash flows. No cumulative-effect adjustment to retained earnings was made.

Lease accounting

In February 2016, the FASB issued Accounting Standards Update No. 2016-02, Leases (Topic 842) (“ASU 2016-02”), which requires lease assets and lease liabilities be recognized for all leases, in addition to the disclosure of key information to enable users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from an entity’s leasing arrangements. ASU 2016-02 defines a lease as a contract, or part of a contract, that conveys both (i) the right to obtain economic benefits from and (ii) direct the use of an identified asset for a period of time in exchange for consideration. Under ASU 2016-02, leases are classified as either finance or operating leases. For finance leases, a lessee shall recognize in profit or loss the amortization of the lease asset and interest on the lease liability. For operating leases, a lessee shall recognize in profit or loss a single lease cost, calculated so that the remaining cost of the lease is allocated over the remaining lease term, generally on a straight-line basis. The initial release of ASU 2016-02 requires the recognition and measurement of leases at the beginning of the earliest period presented using a modified retrospective approach. However, in July 2018, the FASB issued Accounting Standards Update No. 2018-11, Leases (Topic 842): Targeted Improvements, which adds a transition option to allow application of the new standard at the adoption date, with a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. Under this transition option, comparative periods presented in the financial statements would not be restated. Instead, the comparative periods would continue to be presented in the financial statements and related notes to the financial statements under current U.S. generally accepted accounting principles (“GAAP”). The standard and its subsequent amendments are effective for interim and annual periods beginning January 1, 2019. Early adoption is permitted. The Company is currently evaluating the impact of this guidance on its consolidated financial position, results of operations, cash flows, and disclosures and continues to re-evaluate its inventory of leases, including reviewing contracts for potential embedded leases. The Company’s current leases are primarily related to office space in the United States and foreign locations and are classified as operating leases under GAAP. The Company plans to elect the package of practical expedients described in ASU 2016-02, which includes not reassessing the lease classification on these existing leases. The Company also plans to elect the transition option to apply the new lease requirements at the adoption date without restating comparative periods presented in its financial statements. The Company has selected a lease management system and is currently validating the completeness and accuracy of the relevant lease information within the system.

Cloud computing arrangements

In August 2018, the FASB issued Accounting Standards Update No. 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 (“ASU 2018-15”). ASU 2018-15 requires customers in a hosting arrangement that is a service contract to follow existing internal-use software guidance to determine which implementation costs to capitalize and which costs to expense. Under this model, customers would need to determine the nature of the implementation costs and the project stage in which they are incurred to determine which costs to capitalize or expense. Customers would be required to amortize the capitalized implementation costs over the term of the hosting arrangement, which might extend beyond the noncancelable period if there are options to extend or terminate. ASU 2018-15 specifies the financial statement presentation of capitalized implementation costs and related amortization, in addition to required disclosures for material capitalized implementation costs related to hosting arrangements that are service contracts. The standard is effective for interim and annual periods beginning January 1, 2020. Early adoption is permitted. Entities can choose to adopt this guidance prospectively to eligible costs incurred on or after the date the guidance is first applied, or to adopt the guidance retrospectively. The Company is currently evaluating the impact of this guidance on its consolidated financial position, results of operations, and cash flows.