REVENUES

Upon adoption of ASC 606, the Company applied certain transition practical expedients available for modified retrospective adoption.

The Company adopted the practical expedient for the portfolio approach of contracts with similar characteristics in which the Company reasonably expects that the effects on the financial statements of applying this practical expedient to the portfolio would not differ materially from applying this guidance to the individual contracts (or performance obligations) within that portfolio.

The Company also adopted the practical expedient to not disclose the value of unsatisfied performance obligations for (i) contracts with an original expected length of one year or less, (ii) contracts for which INAP recognizes revenue at the amount to which the Company has the right to invoice for services performed, and (iii) the value for variable consideration that is applied to individual performance obligations in a series.

The Company elected to exclude from the measurement of the transaction price all taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction and collected by the entity from a customer (e.g., sales, use, and value added taxes).

Changes in Accounting Policies

The most significant impact of the adoption of the new standard is the requirement for incremental costs to obtain a customer, such as commissions, which previously were expensed as incurred, to be deferred and amortized over the period of contract performance or a longer period if renewals are expected and the renewal commission is not commensurate with the initial commission.

In addition, installation revenues are recognized over the initial contract life rather than over the estimated customer life, as they are not significant to the total contract and therefore do not represent a material right.

Most performance obligations, with the exception of certain sales of equipment or hardware, are satisfied over time as the customer consumes the benefits as we perform. For equipment and hardware sales, the performance obligation is satisfied when control transfers to the customer.

In evaluating the treatment of certain contracts, the Company exercised heightened judgment in deferring installation revenue as well as expense fulfillment and commission costs over the appropriate life. With the exception of the revenues noted above, revenue recognition remains materially consistent with historical practice. However, our approach did not result in any material differences to our condensed consolidated financial statements.

Adjustments to Reported Financial Statements from the Adoption

The following table presents the effect of the adoption of ASC 606 on the Company’s consolidated balance sheet as of January 1, 2018 (in thousands):



	December 31, 2017, as reported			Adjustments			January 1, 2018, as adjusted
ASSETS
Prepaid expenses and other assets	$	8,673		$	6,814		$	15,487
Deposits and other assets	11,015			11,234			22,249

LIABILITIES AND STOCKHOLDERS’ DEFICIT
Deferred revenues	4,861			(749		)	4,112
Deferred tax liability	1,651			209			1,860
Other long-term liabilities	7,744			(4,616		)	3,128
Accumulated deficit	(1,323,723		)	23,204			(1,300,519		)

Current Impact from the Adoption

In accordance with the new revenue standard requirements, the disclosure of the current period impact of adoption on our

condensed consolidated statement of operations and comprehensive loss and balance sheet is as follows (in thousands, except for per share amounts):



	For the Three Months Ended September 30, 2018
	As Reported			Balances without Adoption of ASC 606			Effect of Change Higher/ (Lower)
Net revenues	$	82,972		$	82,822		$	150

Sales, general and administrative	18,170			18,100			70
Total operating costs and expenses	80,798			80,728			70
Income from operations	2,174			2,094			80

Loss before income taxes and equity in earnings of equity-method investment	(14,919		)	(14,999		)	80

Net loss	(15,081		)	(15,161		)	80
Less net income attributable to non-controlling interest	25			25			—
Net loss attributable to INAP stockholders	(15,106		)	(15,186		)	80

Comprehensive loss	$	(15,204	)	$	(15,186	)	$	80



	For the Nine Months Ended September 30, 2018
	As Reported			Balances without Adoption of ASC 606			Effect of Change Higher/ (Lower)
Net revenues	$	239,135		$	238,539		$	596

Sales, general and administrative	57,625			57,671			(46		)
Total operating costs and expenses	233,954			234,000			(46		)
Income from operations	5,181			4,539			642

Loss before income taxes and equity in earnings of equity-method investment	(42,610		)	(43,252		)	642

Net loss	(43,014		)	(43,656		)	642
Less net income attributable to non-controlling interest	75			75			—
Net loss attributable to INAP stockholders	(43,089		)	(43,731		)	642

Comprehensive loss	$	(43,065	)	$	(43,707	)	$	642



	September 30, 2018
	As Reported			Balances without Adoption of ASC 606			Effect of Change Higher/ (Lower)
ASSETS
Contract assets	$	8,026		$	8,022		$	4
Non-current contract assets	12,756			12,756			—

LIABILITIES AND STOCKHOLDERS’ DEFICIT
Deferred revenues	4,696			4,771			(75		)
Other long-term liabilities	4,060			4,060			—
Accumulated deficit	(1,343,609		)	(1,343,534		)	(75		)

Adoption of ASC 606 did not have a significant impact on the Company's condensed consolidated statement of cash flows.

The Company accounts for revenue in accordance with ASC 606. Revenue is recognized 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. The Company enters into contracts that can include various combinations of products and services, which are generally capable of being distinct and accounted for as separate performance obligations.

The Company’s contracts with customers often include performance obligations to transfer multiple products and services to a customer. Common performance obligations of the Company include delivery of services, which are discussed in more detail below. Determining whether products and services are considered distinct performance obligations that should be accounted for separately versus together requires significant judgment by the Company.

A performance obligation is a promise in a contract to transfer a distinct good or service to the customer, and is the unit of account in ASC 606. A contracts transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. Total transaction price is estimated for impact of variable consideration, such as INAP’s service level arrangements, additional usage and late fees, discounts and promotions, and customer care credits. The majority of our contracts have multiple performance obligations, as the promise to transfer individual goods or services is separately identifiable from other promises in the contracts and, therefore, is distinct. For contracts with multiple performance obligations, we allocate the contract's transaction price to each performance obligation based on its relative stand-alone selling price.

The stand-alone selling price (“SSP”) is determined based on observable price. In instances where the SSP is not directly observable, such as when the Company does not sell the product or service separately, INAP determines the SSP using information that may include market conditions and other observable inputs. The Company typically has more than one SSP for individual products and services due to the stratification of those products and services by customers and circumstances. In these instances, the Company may use information such as the size of the customer and geographic region in determining the SSP.

Revenue by source, with sales and usage-based taxes excluded, is as follows (in thousands):



	Three Months Ended September 30, 2018				Three Months Ended September 30, 2017
	INAP US		INAP INTL		INAP US		INAP INTL
Colocation	$	32,946	$	1,372	$	29,114	$	1,166
Network services	13,015		2,719		14,486		2,281
Cloud	19,717		13,203		9,370		12,490
	$	65,678	$	17,294	$	52,970	$	15,937



	Nine Months Ended September 30, 2018				Nine Months Ended September 30, 2017
	INAP US		INAP INTL		INAP US		INAP INTL
Colocation	$	94,747	$	4,349	$	88,740	$	3,745
Network services	40,398		8,482		45,108		5,329
Cloud	51,676		39,483		28,696		39,064
	$	186,821	$	52,314	$	162,544	$	48,138

Revenue by geography is as follows (in thousands):



	Three Months Ended September 30, 2018				Three Months Ended September 30, 2017
	INAP US		INAP INTL		INAP US		INAP INTL
United States	$	66,825	$	—	$	54,006	$	—
Canada	—		9,187		—		9,421
Other countries	—		6,960		—		5,480
	$	66,825	$	16,147	$	54,006	$	14,901



	Nine Months Ended September 30, 2018				Nine Months Ended September 30, 2017
	INAP US		INAP INTL		INAP US		INAP INTL
United States	$	190,071	$	—	$	165,757	$	—
Canada	—		27,846		—		29,320
Other countries	—		21,218		—		15,605
	$	190,071	$	49,064	$	165,757	$	44,925

For the nine months ended September 30, 2018, revenue recognized that was included in the contract liability balance at the beginning of each year was $1.7 million.

Management expects that fulfillment costs and commission fees paid to sales representatives as a result of obtaining service contracts and contract renewals are recoverable and therefore the Company capitalized them as contract costs in the amount of $28.6 million at September 30, 2018. Capitalized fulfillment and commission fees are amortized on a straight-line basis over the determined life, which vary based on the customer segment. For the three and nine months ended September 30, 2018, amortization recognized was $3.1 million and $8.9 million, respectively. There was no impairment loss recorded on capitalized contract costs in the nine months ended September 30, 2018.

Applying the practical expedient pertaining to contract costs, the Company recognizes the incremental costs of obtaining contracts as an expense when incurred if the amortization period of the assets that the Company otherwise would have recognized is one year or less. These costs are included in "Sales, general and administrative" expenses in the accompanying Condensed Consolidated Statements of Operations and Comprehensive Loss.