(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation

The accompanying consolidated financial statements include the accounts of the Company’s wholly‑owned subsidiaries, Exact Sciences Laboratories, LLC, Exact Sciences Finance Corporation, Exact Sciences Europe LTD, Beijing Exact Sciences Medical Technology Company Limited, and variable interest entities. See Note 11 for the discussion of financing arrangements involving certain entities that are variable interest entities that are included in our consolidated financial statements. All significant intercompany transactions and balances have been eliminated in consolidation.

References to “Exact”, “we”, “us”, “our”, or the “Company” refer to Exact Sciences Corporation and its wholly owned subsidiaries.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States (“GAAP”) 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. Actual results could differ from those estimates.

Cash and Cash Equivalents

The Company considers cash on hand, demand deposits in a bank, money market funds, and all highly liquid investments with an original maturity of 90 days or less to be cash and cash equivalents. The Company had no restricted cash at December 31, 2016 and 2015.

Marketable Securities

Management determines the appropriate classification of debt securities at the time of purchase and re‑evaluates such designation as of each balance sheet date. Debt securities carried at amortized cost are classified as held‑to‑maturity when the Company has the positive intent and ability to hold the securities to maturity. Marketable equity securities and debt securities not classified as held‑to‑maturity are classified as available‑for‑sale. Available‑for‑sale securities are carried at fair value, with the unrealized gains and losses, net of tax, reported in other comprehensive income. The amortized cost of debt securities in this category is adjusted for amortization of premiums and accretion of discounts to maturity computed under the straight‑line method. Such amortization is included in investment income. Realized gains and losses and declines in value judged to be other‑than‑temporary on available‑for‑sale securities are included in investment income. The cost of securities sold is based on the specific identification method. Interest and dividends on securities classified as available‑for‑sale are included in investment income.

At December 31, 2016 and December 31, 2015 the Company’s investments were comprised of fixed income investments, and all were deemed available‑for‑sale. The objectives of the Company’s investment strategy are to provide liquidity and safety of principal while striving to achieve the highest rate of return consistent with these two objectives. The Company’s investment policy limits investments to certain types of instruments issued by institutions with investment grade credit ratings and places restrictions on maturities and concentration by type and issuer. Investments in which the Company has the ability and intent, if necessary, to liquidate in order to support its current operations (including those with a contractual term greater than one year from the date of purchase) are classified as current. All of the Company’s investments are considered current. Realized gains were $24,132, $14,205, and $11,000, net of insignificant realized losses, for the years ended December 31, 2016, 2015, and 2014, respectively and are included in investment income.

The Company periodically reviews investments in unrealized loss positions for other-than-temporary impairments. This evaluation includes, but is not limited to, significant quantitative and qualitative assessments and estimates regarding credit ratings, collateralized support, the length of time and significance of a security’s loss position, the Company’s intent not to sell the security, and whether it is more likely than not that the Company will have to sell the security before recovery of its cost basis. For the year ended December 31, 2016, no investments were identified with other-than-temporary declines in value.

Available‑for‑sale securities at December 31, 2016 consist of the following:


	December 31, 2016
			Gains in Accumulated		Losses in Accumulated
			Other Comprehensive		Other Comprehensive		Estimated Fair
(In thousands)	Amortized Cost		Income		Income		Value
Corporate bonds	$	137,013	$	17	$	(93)	$	136,937
Asset backed securities		55,667		3		(30)		55,640
U.S. government agency securities		49,591		3		(120)		49,474
Commercial paper		19,069		8		(1)		19,076
Certificates of deposit		1,053		—		(1)		1,052
Total available-for-sale securities	$	262,393	$	31	$	(245)	$	262,179

Available‑for‑sale securities at December 31, 2015 consist of the following:


	December 31, 2015
			Gains in Accumulated		Losses in Accumulated
			Other Comprehensive		Other Comprehensive		Estimated Fair
(In thousands)	Amortized Cost		Income		Income		Value
Corporate bonds	$	179,471	$	2	$	(262)	$	179,211
Asset backed securities		77,661		—		(166)		77,495
U.S. government agency securities		7,057		—		(18)		7,039
Certificates of deposit		1,999		—		—		1,999
Total available-for-sale securities	$	266,188	$	2	$	(446)	$	265,744

Changes in Accumulated Other Comprehensive Income (Loss)

The amount recognized in accumulated other comprehensive income (loss) (“AOCI”) for the years ended December 31, 2016, 2015 and 2014 were as follows:


					Accumulated
	Cumulative		Unrealized		Other
	Translation		Gain (Loss)		Comprehensive
(In thousands)	Adjustment		on Securities		Income (Loss)
Balance at January 1, 2014	$	—	$	125	$	125
Other comprehensive (loss) income before reclassifications		—		(200)		(200)
Amounts reclassified from accumulated other comprehensive loss		—		(40)		(40)
Net current period change in accumulated other comprehensive income (loss)		—		(240)		(240)
Balance at December 31, 2014	$	—	$	(115)	$	(115)
Other comprehensive (loss) income before reclassifications		11		(361)		(350)
Amounts reclassified from accumulated other comprehensive loss		—		32		32
Net current period change in accumulated other comprehensive income (loss)		11		(329)		(318)
Balance at December 31, 2015	$	11	$	(444)	$	(433)
Other comprehensive (loss) income before reclassifications		(215)		117		(98)
Amounts reclassified from accumulated other comprehensive loss		—		113		113
Net current period change in accumulated other comprehensive income (loss)		(215)		230		15
Balance at December 31, 2016	$	(204)	$	(214)	$	(418)

Amounts reclassified from accumulated other comprehensive income (loss) for the years ended December 31, 2016, 2015 and 2014 were as follows:


	Affected Line Item in the	Year Ended December 31,
Details about AOCI Components (In thousands)	Statement of Operations	2016		2015		2014
Change in value of available-for-sale investments
Sales and maturities of available-for-sale investments	Investment income	$	113	$	32	$	(40)
Total reclassifications		$	113	$	32	$	(40)

Allowance for Doubtful Accounts

The Company estimates an allowance for doubtful accounts against accounts receivable based on estimates of expected collections consistent with historical cash collection experience. The allowance for doubtful accounts is evaluated on a regular basis and adjusted when trends, significant events or other substantive evidence indicate that expected collections will be less than applicable accrual rates. For the years ended December 31, 2016, 2015 and 2014, there was no bad debt expense written off against the allowance and charged to operating expense.

Inventory

Inventory is stated at the lower of cost or market value (net realizable value). The Company determines the cost of inventory using the first-in, first out method (“FIFO”). The Company estimates the recoverability of inventory by reference to internal estimates of future demands and product life cycles, including expiration. The Company periodically analyzes its inventory levels to identify inventory that may expire prior to expected sale or has a cost basis in excess of its estimated realizable value, and records a charge to cost of sales for such inventory as appropriate. In addition, the Company’s products are subject to strict quality control and monitoring which the Company performs throughout the manufacturing process. If certain batches or units of product no longer meet quality specifications or become obsolete due to expiration, the Company records a charge to cost of sales to write down such unmarketable inventory to its estimated realizable value.

Inventory consists of the following:


	December 31,
(In thousands)	2016		2015
Raw materials	$	2,408	$	1,772
Semi-finished and finished goods		4,425		4,905
Total inventory	$	6,833	$	6,677

Property and Equipment

Property and equipment are stated at cost and depreciated using the straight‑line method over the assets’ estimated useful lives. Maintenance and repairs are expensed when incurred; additions and improvements are capitalized. The estimated useful lives of fixed assets are as follows:


		Estimated
Asset Classification		Useful Life
Laboratory equipment		3 - 5 years
Computer equipment and computer software		3 years
Leasehold improvements		Lesser of the remaining lease term or useful life
Building Improvements		Lesser of the remaining building life or useful life
Furniture and fixtures		3 years
Buildings		30 years

Depreciation expense for the years ended December 31, 2016, 2015, and 2014 was $11.3 million, $7.6 million, and $3.7 million, respectively.

At December 31, 2016, the Company had $6.7 million of assets under construction which consisted of $0.1 million related to building and leasehold improvements, $1.7 million of capitalized costs related to software projects and $4.9 million of costs related to machinery and equipment. Depreciation will begin on these assets once they are placed into service. The Company expects to incur minimal costs to complete these projects and expects to be complete these projects in 2017. The Company assesses its long-lived assets, consisting primarily of property and equipment, for impairment when material events and changes in circumstances indicate that the carrying value may not be recoverable. There were no impairment losses for the years ended December 31, 2016, 2015 or 2014.

Software Capitalization Policy

Software development costs related to internal use software are incurred in three stages of development: the preliminary project stage, the application development stage, and the post‑implementation stage. Costs incurred during the preliminary project and post‑implementation stages are expensed as incurred. Costs incurred during the application development stage that meet the criteria for capitalization are capitalized and amortized, when the software is ready for its intended use, using the straight‑line basis over the estimated useful life of the software.

Patent Costs and Intangible Assets

Patent costs, which have historically consisted of related legal fees, are capitalized as incurred, only if the Company determines that there is some probable future economic benefit derived from the transaction. A capitalized patent is amortized over its estimated useful life, beginning when such patent is approved. Capitalized patent costs are expensed upon disapproval, upon a decision by the Company to no longer pursue the patent or when the related intellectual property is either sold or deemed to be no longer of value to the Company. The Company determined that all patent costs incurred during the year ended December 31, 2016, 2015 and 2014 should be expensed and not capitalized as the future economic benefit derived from the transactions cannot be determined.

Direct and indirect manufacturing costs incurred during process validation and for other research and development activities, which are not permitted to be sold, have been expensed to research and development.

Under a technology license and royalty agreement entered into with MDx Health, the Company is required to pay MDx Health milestones on sales of products or services covered by the licensed intellectual property. Once the achievement of a milestone has occurred or is considered probable, an intangible asset and corresponding liability is reported in other long-term assets and accrued expenses, respectively. The intangible asset is amortized over the estimated ten-year useful life of the licensed intellectual property, and such amortization is reported in cost of sales. The liability is relieved once the milestone has been achieved and payment has been made. As of December 31, 2016, an intangible asset of $1.6 million and a liability of $1.3 million are reported in other long-term assets and accrued expenses, respectively. Amortization expense for the years ended December 31, 2016 and 2015 was $0.2 million.

Net Loss Per Share

Basic net loss per common share was determined by dividing net loss applicable to common stockholders by the weighted average common shares outstanding during the period. Basic and diluted net loss per share is the same because all outstanding common stock equivalents have been excluded, as they are anti‑dilutive as a result of the Company’s losses.

The following potentially issuable common shares were not included in the computation of diluted net loss per share because they would have an anti‑dilutive effect due to net losses for each period:


	December 31,
(In thousands)	2016	2015	2014
Shares issuable upon exercise of stock options	3,505	4,937	4,934
Shares issuable upon the release of restricted stock awards	5,601	3,445	1,541
Shares issuable upon the vesting of restricted stock awards related to licensing agreement	—	—	24
	9,106	8,382	6,499

Accounting for Stock‑Based Compensation

The Company requires all share‑based payments to employees, including grants of employee stock options, restricted stock, restricted stock units and shares purchased under an ESPP (if certain parameters are not met), to be recognized in the financial statements based on their fair values.

Revenue Recognition

Laboratory service revenue. The Company’s laboratory service revenue is generated by performing diagnostic services using its Cologuard test, and the service is completed upon delivery of a test result to an ordering physician. The Company recognizes revenue in accordance with the provisions of ASC 954-605, Health Care Entities - Revenue Recognition. The Company recognizes revenue related to billings for Medicare and other payors on an accrual basis, net of contractual and other adjustments, when amounts that will ultimately be collected can be reasonably estimated. Contractual and other adjustments represent the difference between the list price (the billing rate) and the estimated reimbursement rate for each payor. Upon ultimate collection, the amount received from Medicare and other payors where reimbursement was estimated is compared to previous estimates and, if necessary, the prior allowance is adjusted.

The estimates of amounts that will ultimately be collected require significant judgment by management. Some patients have out-of-pocket costs for amounts not covered by their insurance carrier, and the Company bills the patient directly for these amounts in the form of co-payments, deductibles and co-insurance in accordance with their insurance carrier and health plans. In the absence of the ability to estimate the amount that will ultimately be collected for the Company’s services, revenue is recognized upon cash receipt.

The Company uses judgment in determining if it is able to make an estimate of what will ultimately be collected. The Company also uses judgment in estimating the amounts it expects to collect by payor. The Company’s judgments will continue to evolve in the future as it continues to gain payment experience with payors and patients.

The components of our laboratory service revenue, as recognized upon accrual or cash receipt, for the years ended December 31, 2016 and 2015 were as follows:


	Year Ended December 31,
(In thousands)	2016		2015			2014
Revenue recognized on an accrual basis	$	87,037	$	36,364	$	1,388
Revenue recognized when cash is received		12,339		3,073		116
Total	$	99,376	$	39,437	$	1,504

License fees. License fees for the licensing of product rights are recorded as deferred revenue upon receipt of cash and recognized as revenue on a straight‑line basis over the license period.

As more fully described in Note 3 below, in connection with the Company’s transaction with Genzyme Corporation, Genzyme agreed to pay the Company a total of $18.5 million, of which $16.65 million was paid on January 27, 2009 and $1.85 million was subject to a holdback by Genzyme to satisfy certain potential indemnification obligations in exchange for the assignment and licensing of certain intellectual property to Genzyme. The Company’s on‑going performance obligations to Genzyme under the Collaboration, License and Purchase Agreement (the “CLP Agreement”), as described below, including its obligation to deliver through licenses certain intellectual property improvements to Genzyme, if improvements are made during the initial five‑year collaboration period, were deemed to be undelivered elements of the CLP Agreement on the date of closing. Accordingly, the Company deferred the initial $16.65 million in cash received at closing and amortized that up‑front payment on a straight line basis into revenue over the initial five‑year collaboration period ending in January 2014. The Company received the first holdback amount of $962,000, which included accrued interest, due from Genzyme during the first quarter of 2010. The Company received the second holdback amount of $934,000 which included accrued interest due, from Genzyme during the third quarter of 2010. The amounts were deferred and were amortized on a straight‑line basis into revenue over the remaining term of the collaboration at the time of receipt.

In addition, Genzyme purchased 3,000,000 shares of common stock purchased from the Company on January 27, 2009 for $2.00 per share, representing a premium of $0.51 per share above the closing price of the Company’s common stock on that date of $1.49 per share. The aggregate premium paid by Genzyme over the closing price of the Company’s common stock on the date of the transaction of $1.53 million is deemed to be a part of the total consideration for the CLP Agreement. Accordingly, the Company deferred the aggregate $1.53 million premium and amortized that amount on a straight line basis into revenue over the initial five‑year collaboration period ending in January 2014.

The Company did not recognize license fee revenue for the years ended December 31, 2016 and 2015. The Company recognized approximately $0.3 million in license fee revenue for the year ended December 31, 2014 in connection with the amortization of the up-front payments from Genzyme.

Advertising Costs

The Company expenses the costs of media advertising at the time the advertising takes place. The Company expensed approximately $38.1 million, $10.8 million, and $5.3 million of media advertising during the years ended December 31, 2016, 2015, and 2014, respectively.

Fair Value Measurements

The FASB has issued authoritative guidance that requires fair value to be based on the assumptions market participants would use when pricing an asset or liability and establishes a fair value hierarchy that prioritizes the information used to develop those assumptions. Under that standard, fair value measurements are separately disclosed by level within the fair value hierarchy. The fair value hierarchy establishes and prioritizes the inputs used to measure fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs. Observable inputs are inputs that reflect the assumptions that market participants would use in pricing the asset or liability developed based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company’s assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances.

The three levels of the fair value hierarchy established are as follows:


Level 1	Quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access as of the reporting date. Active markets are those in which transactions for the asset or liability occur in sufficient frequency and volume to provide pricing information on an ongoing basis.
Level 2	Pricing inputs other than quoted prices in active markets included in Level 1, which are either directly or indirectly observable as of the reporting date. These include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active.
Level 3	Unobservable inputs that reflect the Company’s assumptions about the assumptions that market participants would use in pricing the asset or liability. Unobservable inputs shall be used to measure fair value to the extent that observable inputs are not available.

Fixed‑income securities and mutual funds are valued using a third-party pricing agency. The valuation is based on observable inputs including pricing for similar assets and other observable market factors. There has been no material pricing change from period to period.

The following table presents the Company’s fair value measurements as of December 31, 2016 along with the level within the fair value hierarchy in which the fair value measurements, in their entirety, fall.


			Fair Value Measurement at December 31, 2016 Using:
			Quoted Prices		Significant
			in Active		Other		Significant
			Markets for		Observable		Unobservable
	Fair Value at		Identical Assets		Inputs		Inputs
(In thousands)	December 31, 2016		(Level 1)		(Level 2)		(Level 3)
Cash and cash equivalents
Cash and money market	$	48,921		48,921		—		—
Available-for-sale
Marketable securities
Corporate bonds		136,937		—		136,937		—
Asset backed securities		55,640		—		55,640		—
U.S. government agency securities		49,474		—		49,474		—
Commercial paper		19,076		—		19,076		—
Certificates of deposit		1,052		—		1,052		—
Total	$	311,100	$	48,921	$	262,179	$	—

The following table presents the Company’s fair value measurements as of December 31, 2015 along with the level within the fair value hierarchy in which the fair value measurements, in their entirety, fall.


			Fair Value Measurement at December 31, 2015 Using:
			Quoted Prices		Significant
			in Active		Other		Significant
			Markets for		Observable		Unobservable
	Fair Value at		Identical Assets		Inputs		Inputs
(In thousands)	December 31, 2015		(Level 1)		(Level 2)		(Level 3)
Cash and cash equivalents
Cash and money market	$	37,435	$	37,435	$	—	$	—
Commercial paper		3,700		—		3,700		—
Available-for-sale
Marketable securities
Corporate bonds		179,211		—		179,211		—
Asset backed securities		77,495		—		77,495		—
U.S. government agency securities		7,039		—		7,039		—
Certificates of deposit		1,999		—		1,999		—
Total	$	306,879	$	37,435	$	269,444	$	—

The Company monitors investments for other-than-temporary impairment. It was determined that unrealized gains and losses at December 31, 2016 and 2015 are temporary in nature because the change in market value for those securities has resulted from fluctuating interest rates rather than a deterioration of the credit worthiness of the issuers. So long as the Company holds these securities to maturity, it is unlikely to experience gains or losses. In the event that the Company disposes of these securities before maturity, it is expected that realized gains or losses, if any, will be immaterial.

The following table summarizes the gross unrealized losses and fair values of investments in an unrealized loss position as of December 31, 2016, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position:


		December 31, 2016
		Less than 12 months			12 months or greater				Total
(In thousands)		Fair Value		Gross Unrealized Loss		Fair Value		Gross Unrealized Loss		Fair Value		Gross Unrealized Loss
Marketable securities
Corporate bonds	$	94,999	$	(93)	$	—	$	—	$	94,999	$	(93)
Asset backed securities		41,656		(27)		3,506		(2)		45,162		(29)
U.S. government agency securities		44,911		(120)		—		—		44,911		(120)
Commercial paper		5,606		(2)		—		—		5,606		(2)
Certificates of deposit		1,052		(1)		—		—		1,052		(1)
Total	$	188,224	$	(243)	$	3,506	$	(2)	$	191,730	$	(245)

The following table summarizes the gross unrealized losses and fair value of investments in an unrealized loss position as of December 31, 2015, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position:


		December 31, 2015
		Less than 12 months			12 months or greater				Total
(In thousands)		Fair Value		Gross Unrealized Loss		Fair Value		Gross Unrealized Loss		Fair Value		Gross Unrealized Loss
Marketable Securities
Corporate bonds	$	166,238	$	(262)	$	—	$	—	$	166,238	$	(262)
U.S. government agency securities		7,039		(18)		—		—		7,039		(18)
Asset backed securities		72,792		(164)		3,887		(2)		76,679		(166)
Total	$	246,069	$	(444)	$	3,887	$	(2)	$	249,956	$	(446)

The following table summarizes contractual underlying maturities of the Company’s available‑for‑sale investments at December 31, 2016:


		Due one year or less			Due after one year through four years
(In thousands)		Cost		Fair Value		Cost		Fair Value
Marketable securities
Corporate bonds	$	128,443	$	128,389	$	8,570	$	8,548
Certificates of deposit		—		—		1,053		1,052
Commercial paper		19,069		19,076		—		—
U.S. government agency securities		14,553		14,545		35,038		34,929
Asset backed securities		—		—		55,667		55,640
Total	$	162,065	$	162,010	$	100,328	$	100,169

Concentration of Credit Risk

In accordance with GAAP, the Company is required to disclose any significant off‑balance‑sheet risk and credit risk concentration. The Company has no significant off‑balance‑sheet risk, such as foreign exchange contracts or other hedging arrangements. Financial instruments that subject the Company to credit risk consist of cash, cash equivalents and marketable securities. As of December 31, 2016, the Company had cash and cash equivalents deposited in financial institutions in which the balances exceed the federal government agency insured limit of $250,000 by approximately $47.9 million. The Company has not experienced any losses in such accounts and management believes it is not exposed to any significant credit risk.

Through December 31, 2016, all of the Company’s laboratory service revenues have been derived from the sale of Cologuard, and one payor, Centers for Medicare and Medicaid Services, has provided greater than 10% of revenue during the years ended December 31, 2016 and 2015. Medicare revenue as a percentage of total laboratory service revenue was 60% and 71% for the years ended December 31, 2016 and 2015, respectively. Medicare accounts receivable as a percentage of total accounts receivable were 63% and 64% at December 31, 2016 and 2015, respectively. As the number of payors reimbursing for Cologuard increases, the percentage of laboratory service revenue derived from Medicare will continue to change as a percentage of revenue and accounts receivable.

Tax Positions

A valuation allowance to reduce the deferred tax assets is reported if, based on the weight of the evidence, it is more likely than not that some portion or all of the deferred tax assets will not be realized. The Company has incurred significant losses since its inception and due to the uncertainty of the amount and timing of future taxable income, the Company has determined that a $277.9 million and $215.1 million valuation allowance at December 31, 2016 and 2015 is necessary to reduce the tax assets to the amount that is more likely than not to be realized. The change in valuation allowance for December 31, 2016 and 2015 was $62.8 million and $53.2 million, respectively. Due to the existence of the valuation allowance, future changes in the Company’s unrecognized tax benefits will not impact the Company’s effective tax rate.

Subsequent Events

The Company evaluates events that occur through the filing date and discloses those events or transactions that provide additional evidence with respect to conditions that existed at the date of the balance sheet. In addition, the financial statements are adjusted for any changes in estimates resulting from the use of such evidence.

Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board issued ASU No. 2014-9, Revenue from Contracts with Customers (Topic 606), (the “New Revenue Standard”) requiring an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. Additional disclosures will also be required to enable users to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. The New Revenue Standard will replace most existing revenue recognition guidance in GAAP when it becomes effective and permits the use of either the retrospective or modified retrospective method upon adoption. Adoption of the New Revenue Standard is permitted as early as the first quarter of 2017 and is required by the first quarter of 2018. The Company does not plan to early adopt this standard and has not yet selected a transition method. The Company has completed its preliminary evaluation of the potential financial statement impact of the New Revenue Standard on prior and future reporting periods. The Company does not expect material changes to the timing of when the Company recognizes revenue or the method by which the Company measures its single revenue stream, lab service revenue. Further, regarding the contract acquisition cost component of the New Revenue Standard, the Company’s analysis supports use of the practical expedient when recognizing expense related to incremental costs incurred to acquire a contract, as the recovery of such costs is completed in less than one year’s time. Additionally, incremental costs to obtain contracts have been immaterial to date. Accordingly, the Company does not expect any material changes to the timing of when it recognizes expenses related to contract acquisition costs. The Company will continue its evaluation of the New Revenue Standard through the date of adoption.

In February 2016, the Financial Accounting Standards Board issued Accounting Standards Update No. 2016-02, “Leases (Topic 842),” (“Update 2016-02”) which requires recognition of lease assets and lease liabilities by lessees for those leases classified as operating leases under previous GAAP. The amendments in this update are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. In transition, lessees and lessors are required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach. Early adoption is permitted. The Company is currently evaluating the effects that the adoption of Update 2016-02 will have on the Company’s consolidated financial statements, and anticipate that the new guidance will impact the Company’s consolidated financial statements as it has several leases. As further described in Note 7. Commitments and Contingencies, as of December 31, 2016, we had future minimum operating lease payments of $6.9 million.

In March 2016, the Financial Accounting Standards Board issued Accounting Standards Update No. 2016-09, “Compensation —Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting” (“Update 2016-09”) as part of its Simplification Initiative. The areas for simplification in this update involve several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, accounting for forfeitures, and classification in the statements of cash flows. The amendments in this update are effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. With the adoption of Update 2016-09, forfeiture estimates are no longer required and the effects of actual forfeitures are recorded at the time they occur. The Company will adopt Update 2016-09 in the first quarter of 2017 and will no longer use a forfeiture rate. The adoption of this aspect of the guidance is not expected to have a material impact on the Company’s financial statements.

Additionally, if in the future, the Company is able to utilize its deferred tax assets to offset taxes payable, excess tax benefit stock option deductions will be reflected in the consolidated statements of operations as a component of the provision for income taxes, whereas they previously would have been recognized in equity on the consolidated balance sheet. As of December 31, 2016, the Company had $62.7 million in excess tax benefit stock option deductions which would be subject to this reclassification if the deferred tax assets are realized in the future. Upon adoption, all such deductions will be fully offset by the valuation allowance.

In August 2016, the Financial Accounting Standards Board issued Accounting Standards Update No. 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments” (“Update 2016-15”). Current GAAP either is unclear or does not include specific guidance on the eight cash flow classification issues included in the amendments in Update 2016-15. The amendments are an improvement to GAAP because they provide guidance for each of the eight issues, thereby reducing the current and potential future diversity in practice. The amendments in Update 2016-15 are effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. The company has evaluated Update 2016-15 and we do not expect the adoption of this guidance to have a material impact on our statement of cash flows.

In October 2016, the Financial Accounting Standards Board issued Accounting Standards Update No. 2016-16, “Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory,” (“Update 2016-16”). This amendment improves the accounting for the income tax consequences of intra-entity transfers of assets other than inventory. Update 2016-16 is effective for fiscal years and interim periods within those years beginning after December 15, 2017. Early adoption is permitted. The Company does not anticipate that the adoption of Update 2016-16 to have a significant impact on its consolidated financial statements.

In October 2016, the Financial Accounting Standards Board issued Accounting Standards Update No. 2016-17, “Consolidation (Topic 810): Interests Held through Related Parties That Are Under Common Control,” (“Update 2016-17”). The amendments in Update 2016-17 change how a reporting entity that is the single decision maker of a variable interest entity should treat indirect interests in the entity held through related parties that are under common control with the reporting entity when determining whether it is the primary beneficiary of that variable interest entity. The amendment is effective for fiscal years and interim periods within those years beginning after December 15, 2016. The Company does not expect the adoption of Update 2017-17 to have a material impact on its consolidated financial statements.

In November 2016, the Financial Accounting Standards Board issued Accounting Standards Update No. 2016-18, “Statement of Cash Flows: Restricted Cash,” (“Update 2016-18”). Update 2016-18 provides guidance on the classification of restricted cash in the statement of cash flows. The amendments are effective for interim and annual periods beginning after December 15, 2017. Early adoption is permitted. The amendments in the Update 2016-18 should be adopted on a retrospective basis. The Company does not expect that adoption of this amendment to have a material effect on its consolidated financial statements as the Company does not have restricted cash.

In January 2017, the Financial Accounting Standards Board issued Accounting Standards Update No. 2017-01, “Business Combinations (Topic 805): Clarifying the Definition of a Business,” (“Update 2017-01”). in an effort to clarify 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. The amendments of this ASU are effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. The adoption of this guidance is not expected to have a material impact on the Company’s financial statements.

Foreign Currency Translation

For the Company’s international subsidiaries, the local currency is the functional currency. Assets and liabilities of these subsidiaries are translated into United States dollars at the period-end exchange rate or historical rates, as appropriate. Consolidated statements of operations amounts are translated at average exchange rates for the period. The cumulative translation adjustments resulting from changes in exchange rates are included in the consolidated balance sheet as a component of accumulated other comprehensive loss in total Exact Sciences Corporation’s shareholders’ equity. Transaction gains and losses are included in the consolidated statement of operations.

Reclassifications

Certain prior year amounts have been reclassified to conform to the current year