Significant Accounting Policies (Policies)

9 Months Ended

Sep. 30, 2017

Special Items - We recognize expenses resulting directly from our business combinations, employee termination benefits, certain research and development (“R&D”) agreements, certain contract terminations, goodwill and intangible asset impairment, consulting and professional fees and asset impairment or loss on disposal charges connected with global restructuring, quality enhancement and remediation efforts, operational excellence initiatives, and other items as “Special items” in our condensed consolidated statement of earnings. “Special items” included (in millions):

	Three Months Ended					Nine Months Ended
	September 30,					September 30,
	2017			2016		2017			2016
Biomet merger-related
Consulting and professional fees	$	19.9		$	59.0	$	60.7		$	138.4
Employee termination benefits		5.4			7.1		12.0			14.3
Dedicated project personnel		10.2			21.9		33.1			64.8
Relocated facilities		1.8			9.5		6.1			17.5
Certain litigation matters		5.0			-		5.0			-
Contract terminations		-			3.5		-			28.8
Information technology integration		1.3			4.8		4.9			9.3
Goodwill and intangible asset impairment		32.7			-		59.5			28.0
Other		4.8			8.0		25.0			12.4
Total Biomet merger-related		81.1			113.8		206.3			313.5
Other
Consulting and professional fees		56.3			14.6		158.4			30.3
Employee termination benefits		(0.6	)		3.2		2.0			3.2
Dedicated project personnel		14.0			8.2		35.5			11.5
Impairment/loss on disposal of assets		-			-		-			1.1
LDR merger consideration compensation expense		-			24.1		-			24.1
Relocated facilities		0.6			-		3.1			0.2
Certain litigation matters		3.0			3.7		10.0			3.7
Contract terminations		-			0.1		-			1.1
Information technology integration		1.0			0.8		1.8			1.1
Certain R&D agreements		-			-		2.5			-
Contingent consideration adjustments		1.7			-		(1.5	)		-
Other		8.3			1.9		16.0			7.2
Total Other		84.3			56.6		227.8			83.5
Special items	$	165.4		$	170.4	$	434.1		$	397.0

Consulting and professional fees include expenditures related to third-party integration consulting performed in a variety of areas such as tax, compliance, logistics and human resources for our business combinations including our merger with Biomet, Inc. (“Biomet”); legal fees related to the consummation of mergers and acquisitions and certain litigation and compliance matters; other consulting and professional fees and contract labor related to our quality enhancement and remediation efforts and operational excellence initiatives; third-party fees related to severance and termination benefits matters; costs of complying with our deferred prosecution agreement; and consulting fees related to certain information system integrations.

Dedicated project personnel expenses include the salary, benefits, travel expenses and other costs directly associated with employees who are 100 percent dedicated to our integration of acquired businesses, employees who have been notified of termination, but are continuing to work on transferring their responsibilities and employees working on our quality enhancement and remediation efforts and operational excellence initiatives.

As part of the Biomet merger (defined below), we recognized $209.0 million of intangible assets for in-process research and development (“IPR&D”) projects. We recorded impairment losses related to IPR&D intangible assets of $18.8 million and $28.0 million during the nine month periods ended September 30, 2017 and 2016, respectively. The impairments were primarily due to the termination of certain IPR&D projects. We also recognized $479.0 million of intangible assets for trademarks that we designated as having an indefinite life. In the nine month period ended September 30, 2017, we reclassified one of these trademarks to a finite life asset which resulted in an impairment of $8.0 million.

During the three and nine month periods ended September 30, 2017, we recognized a $32.7 million goodwill impairment charge on our Office Based Technologies reporting unit. See Note 9 for additional details.

A further detailed description of expenses included in “Special items” can be found in Note 2 to our Consolidated Financial Statements in our Annual Report on Form 10-K for the year ended December 31, 2016.

On June 24, 2015, pursuant to an agreement and plan of merger dated April 24, 2014, we acquired LVB Acquisition, Inc. (“LVB”), the parent company of Biomet, and LVB and Biomet became our wholly-owned subsidiaries (sometimes hereinafter referred to as the “Biomet merger” or the “merger”). After the closing date of the Biomet merger, we started to implement our integration plans to drive operational synergies. Part of these integration plans included termination of employees and certain contracts with independent agents, distributors, suppliers and lessors. Our integration plans are expected to last through mid-2018 and we expect to incur a total of $170 million for employee termination benefits and $140 million for contract termination expense in that time period. As of September 30, 2017, we have incurred a cumulative total of $163.8 million for employee termination benefits and $134.9 million for contract termination expense. The following table summarizes the liabilities related to these integration plans (in millions):

	Employee
	Termination			Contract
	Benefits			Terminations			Total
Balance at December 31, 2016	$	38.1		$	35.1		$	73.2
Additions		12.0			-			12.0
Cash payments		(33.1	)		(9.4	)		(42.5	)
Foreign currency exchange rate changes		1.2			0.4			1.6
Balance at September 30, 2017	$	18.2		$	26.1		$	44.3

Recent Accounting Pronouncements

Recent Accounting Pronouncements – In January 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2017-04 – Simplifying the Test for Goodwill Impairment. This ASU requires goodwill impairment to be measured as the amount by which a reporting unit's carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. Under previous guidance, if the carrying amount of a reporting unit’s net assets were greater than its fair value, impairment was measured as the excess of the carrying amount of the reporting unit’s goodwill over its implied fair value. The determination of a reporting unit’s implied goodwill generally required significant estimates to fair value its net assets. Therefore, this ASU simplifies goodwill impairment testing by eliminating the need to estimate the fair value of a reporting unit’s net assets. The impact of this ASU is dependent on the specific facts and circumstances of future impairments and is applied prospectively on testing that occurs subsequent to adoption. We elected to early adopt this ASU in the third quarter of 2017. As a result, the new ASU was used to determine the goodwill impairment charge on our Office Based Technologies reporting unit that was recognized in the third quarter of 2017. See Note 9 for additional details regarding this goodwill impairment charge.

In October 2016, the FASB issued ASU 2016-16 – Intra-Entity Asset Transfers of Assets Other than Inventory. This ASU changes the accounting for the tax effects of intra-entity asset transfers/sales. Under current GAAP, the tax effects of intra-entity asset transfers/sales are deferred until the transferred asset is sold to a third party or otherwise recovered through use. Under the new guidance, the tax expense from the sale of the asset in the seller’s tax jurisdiction is recognized when the transfer occurs, even though the pre-tax effects of that transaction are eliminated in consolidation. Any deferred tax asset that arises in the buyer’s jurisdiction would also be recognized at the time of the transfer. The new guidance does not apply to intra-entity transfers/sales of inventory. We early adopted this standard effective January 1, 2017. The modified retrospective approach is required for transition, which resulted in us recognizing a cumulative-effect adjustment in Retained earnings as of January 1, 2017 for intra-entity transfers/sales we had executed prior to that date. The January 1, 2017 cumulative effect adjustment resulted in a $72.7 million decrease to Retained earnings, a $3.9 million decrease to Other prepaid expenses and current assets, a $22.4 million decrease in Other assets, a $2.0 million decrease to Income taxes payable, and a $48.4 million increase to Deferred income taxes. The adoption of this ASU resulted in additional tax expense of $1.5 million and a tax benefit of $2.2 million to our provision for income taxes in the three and nine month periods ended September 30, 2017, respectively, compared to what it would have been under the previous accounting rules.

In May 2014, the FASB issued ASU 2014-09 – Revenue from Contracts with Customers. This ASU provides a five-step model for revenue recognition that all industries will apply to recognize revenue when a customer obtains control of a good or service. This ASU will be effective for us beginning January 1, 2018. Entities are permitted to apply the standard and related amendments either retrospectively to each prior reporting period presented or retrospectively with the cumulative effect of initially applying the ASU recognized at the date of initial application.

During the fourth quarter of 2016, we commenced an initial evaluation of the new standard and a related assessment and review of a representative sample of existing revenue contracts with our customers on some of our most significant revenue streams. In 2017, we have expanded our scope to perform an analysis at locations with less significant revenue streams and have provided training on the new standard to finance personnel across all of our locations. Our assessment of our revenue streams is substantially complete. Based upon our assessment, we do not believe there will be a material change to the timing of our revenue recognition. However, we will be required to reclassify certain immaterial costs from selling, general and administrative (“SG&A”) expense to net sales, which will result in a reduction of net sales, but have no impact on operating profit. In the fourth quarter of 2017, we will focus on additional disclosures we may need to make and the effect of this ASU on our internal control over financial reporting or other changes in business practices and processes. We plan to adopt this new standard using the retrospective method, which will result in us restating prior reporting periods presented. As noted previously, we expect this will result in us reclassifying certain immaterial costs from SG&A expense to net sales in each of those prior reporting periods. Our evaluation of ASU 2014-09 is ongoing and not complete.

In February 2016, the FASB issued ASU 2016-02 – Leases. This ASU requires lessees to recognize right-of-use assets and lease liabilities on the balance sheet. This ASU will be effective for us beginning January 1, 2019. Early adoption is permitted. The ASU must be adopted using a modified retrospective transition approach at the beginning of the earliest comparative period in the consolidated financial statements. We own most of our manufacturing facilities, but lease various office space throughout the world. We are formalizing our project team and in the fourth quarter of 2017 will begin evaluating our leases and the related impact this ASU will have on our consolidated financial statements.

In March 2017, the FASB issued ASU 2017-07 – Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. This ASU requires us to report the service cost component of pensions in the same location as other compensation costs arising from services rendered by the pertinent employees during the period. We will be required to report the other components of net benefit costs in Other Income (Expense) in the statement of earnings. This ASU will be effective for us beginning January 1, 2018. The ASU must be applied retrospectively for the presentation of the service cost component and the other components of net periodic pension cost in the statement of earnings and prospectively, on and after the effective date, for the capitalization of the service cost component of net periodic pension cost in assets. See Note 12 for further information on the components of our net benefit cost.

In August 2017, the FASB issued ASU 2017-12 – Targeted Improvements to Accounting for Hedging Activities. This ASU amends the hedge accounting guidance to simplify the application of hedge accounting, makes more financial and nonfinancial hedging strategies eligible for hedge accounting treatment, changes how companies assess effectiveness and updates presentation and disclosure requirements. We are currently evaluating the impact this ASU will have on our consolidated financial statements; however, based on our current hedging portfolio, we do not anticipate that this ASU will have a significant impact on our financial position, results of operations or cash flows. This ASU will be effective for us January 1, 2019, with early adoption permitted. After adoption, we may explore new hedging opportunities that are eligible for hedge accounting treatment under the new standard.

There are no other recently issued accounting pronouncements that we have not yet adopted that are expected to have a material effect on our financial position, results of operations or cash flows.