Summary of Business and Significant Accounting Policies

Business

WageWorks, Inc., (together with its subsidiaries, “WageWorks” or the “Company”) was incorporated in the state of Delaware in 2000. The Company is a leader in administering Consumer-Directed Benefits (“CDBs”), which empower employees to save money on taxes while also providing corporate tax advantages for employers. The Company operates as a single reportable segment on an entity level basis.

Basis of Presentation

In the opinion of the Company’s management, the unaudited interim condensed consolidated financial statements and the related notes have been prepared on the same basis as the audited consolidated financial statements and reflect all adjustments that, in the opinion of management, are necessary for a fair presentation of the results for the interim periods presented in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”), including all adjustments as a result of the Company's restatement. The results of the interim period presented herein are not necessarily indicative of the results of future periods or annual results for the year ended December 31, 2016.

These unaudited interim condensed consolidated financial statements and the related notes should be read in conjunction with the December 31, 2015 audited financial statements and related notes, together with management’s discussion and analysis of financial condition and results of operations, included in the Company’s Annual Report on Form 10-K. The December 31, 2015 consolidated balance sheets, included in this interim Quarterly Report on Form 10-Q/A, were derived from audited financial statements.

There have been no material changes in the Company’s significant accounting policies from those that were disclosed in the Company’s audited consolidated financial statements for the fiscal year ended December 31, 2015 included in the Company’s Annual Report on Form 10-K, except for the impairment of long-lived assets, which is discussed below in the caption, Accounting for Impairment of Long-lived Assets.

Principles of Consolidation

The unaudited condensed consolidated financial statements include the accounts of WageWorks, Inc. and its subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.

Use of Estimates

The preparation of financial statements in conformity with U.S. 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 revenue and expenses during the reporting period. Significant estimates in these condensed consolidated financial statements include allowances for doubtful accounts, estimates of future cash flows associated with assets, useful lives for depreciation and amortization, loss contingencies, expired and unredeemed products, deferred tax assets, reserve for income tax uncertainties, the assumptions used for stock-based compensation, the assumptions used for software and website development cost classification, and valuation and impairments of goodwill and long-lived assets. Actual results could differ from those estimates. In making its estimates, the Company considers the current economic and legislative environment and has considered those factors when reviewing the underlying assumptions of the estimates.

Restatement

Restatement Background

Subsequent to the issuance of the condensed consolidated financial statements as of September 30, 2017, and as previously disclosed on April 5, 2018, the Board concluded that the Company’s financial statements for (i) the quarterly and year-to-date periods ended June 30 and September 30, 2016, (ii) the year ended December 31, 2016 and (iii) the quarterly and year-to-date periods ended March 31, June 30 and September 30, 2017 should be restated and should no longer be relied upon. Further, the Company’s disclosures related to such financial statements and related communications issued by or on behalf of the Company with respect to the Non-Reliance Periods, including management’s assessment of internal control over financial reporting as of December 31, 2016, should also no longer be relied upon. The determination was made upon the recommendation of the Audit Committee as a result of the investigation described below and after consultation with KPMG LLP, the Company’s former independent registered public accounting firm and management team. The investigation included a review of certain issues, including revenue recognition, related to the accounting for a government contract during fiscal 2016 and associated issues with whether there was an open flow of information and appropriate tone at the top for an effective control environment, the timing and presentation of revenue recognition under certain contracts and arrangements, and the impairment assessment for KP connector, our internal use software, among other matters.

During the course of this investigation, and during the subsequent review of our accounting practices, accounting and financial reporting errors were identified. The matters primarily resulted in corrections in accounting under U.S. GAAP related to revenue recognition for a government contract, the timing and presentation of revenue recognition under certain contracts and arrangements, and the impairment assessment for KP connector, our internal use software. Accordingly, the Company is restating its condensed consolidated financial statements for the three and six months ended June 30, 2016 to correct these errors, the most significant of which are described below.

Revenue Recognition Adjustments

OPM

In March 2016, the Company entered into an agreement to provide Flexible Spending Accounts ("FSA") services to the United States Government Office of Personnel Management ("OPM") through 2020. Upon commencement of the agreement, the Company performed certain professional services that it believed were within the scope of the agreement and accordingly recognized $1.1 million in revenue in both the three and six months ended June 30, 2016. In April 2018, the Company determined that it should not have recognized revenue related to the OPM professional services, and the related receivable should be reversed. As a result, the Company has made adjustments to reduce revenue by $1.1 million for the three and six months ended June 30, 2016.

Revenue Recognition and Timing Presentation

Starting in the second quarter of 2016, the Company inconsistently applied its policy to net expenses against healthcare revenue which led to an accounting error that impacted healthcare revenue and cost of revenues.

Internally Developed Software Impairment

The Company re-assessed the fair value of KP Connector, which is internal use software developed by the Company based on the specifications outlined in a client agreement. In the second quarter of 2016, the client notified the Company that it no longer needed its services, making KP Connector's carrying value unrecoverable as of June 30, 2016. Accordingly, the Company recorded a $3.7 million impairment charge to amortization and change in contingent consideration expense in the condensed consolidated statements of income and a corresponding reduction of property and equipment, net, in the condensed consolidated balance sheets.

Stock-Based Compensation Adjustments

The Company adjusted stock-based compensation expense related to performance-based restricted stock units. These shares vest based on the satisfaction of specific performance criteria. At each vesting date, the holder of the award is issued shares of the Company’s common stock. Compensation expense from these awards is equal to the fair market value of the Company’s common stock on the date of grant and is recognized over the remaining service period based on the probable outcome of achievement of the financial metrics. The metrics included items that have changed as a result of the restatement, and therefore the Company has re-measured the stock-based compensation expense for performance-based restricted stock units as of the three and six months ended June 30, 2016. The following tables summarize the impact of the restatement on performance-based restricted stock units and on the Company's total stock-based compensation expense:

Performance-based restricted stock units compensation expense (in millions):



	Three Months Ended June 30, 2016							Six Months Ended June 30, 2016

	As Previously Reported		Adjustments			As restated		As Previously Reported		Adjustments			As restated
Stock-based compensation expense related to restricted stock units (in millions)	$	6.2	$	(1.3	)	$	4.9	$	10.0	$	(1.3	)	$	8.7

	At June 30, 2016
	As Previously Reported		Adjustments			As restated
Total unrecorded stock-based compensation cost associated with restricted stock units (in millions)	$	37.5	$	(12.6	)	$	24.9

Total restatement adjustments for stock-based compensation expense (in thousands):



	Three Months Ended June 30, 2016							Six Months Ended June 30, 2016

	As Previously Reported		Adjustments			As restated		As Previously Reported		Adjustments			As restated
Cost of revenues	$	1,818	$	—		$	1,818	$	2,968	$	—		$	2,968
Technology and development	659		(38		)	621		1,144		(38		)	1,106
Sales and marketing	791		(53		)	738		1,498		(52		)	1,446
General and administrative	5,583		(1,227		)	4,356		9,232		(1,228		)	8,004
Total	$	8,851	$	(1,318	)	$	7,533	$	14,842	$	(1,318	)	$	13,524

The Company recorded additional adjustments to the condensed consolidated financial statements for the three and six months ended June 30, 2016, primarily related to the following transactions:


•	To correct billing errors and the recognition of invoices and related invoice adjustments in the proper reporting period


•	To account for the reserve of potentially uncollectible customer obligations for pass-through employee participant reimbursements in the proper period


•	To correct timing differences between the obligation payments from employer clients and the receipt of cash in the Company's bank accounts, which resulted in a reclassification from cash and cash equivalents to customer obligations


•	To record interest and penalties for unreported employee participant and employer clients unclaimed property


•	To record capital lease obligations originally recognized incorrectly as operating leases


•	To record the reclassification of customer obligations from accounts receivable based on the correction of the timing of employer client billings and payments


•	To record the reduction in certain operating expense due to over-accrual

Please see the tables below for further details regarding the adjustments. In conjunction with the restatement, the Company determined that it would be appropriate, within this Form 10-Q/A, to reflect these adjustments in the three and six months ended June 30, 2016.

The tax impact in connection with the restatement adjustments was recorded for the three and six months ended June 30, 2016.

Impact of the Restatement

The following table presents the Company’s condensed consolidated statements of income (loss) as previously reported, restatement adjustments and the condensed consolidated statements of income (loss) as restated for the three and six months ended June 30, 2016 (in thousands, except per share amounts):



Condensed Consolidated Statements of Income (Loss)(Unaudited)
(In thousands, except per share amounts)

	Three Months Ended June 30, 2016										Six Months Ended June 30, 2016
	As Previously Reported			Adjustments				As Restated			As Previously Reported			Adjustments				As Restated
Revenues:
Healthcare	$	48,070		$	(2,455	)	(a)	$	45,615		$	98,440		$	(2,455	)	(a)	$	95,985
Commuter	17,383			83			(b)	17,466			34,759			83			(b)	34,842
COBRA	17,879			(672		)	(c)	17,207			33,285			(672		)	(c)	32,613
Other	4,393			(18		)	(b)	4,375			8,243			(18		)	(b)	8,225
Total revenues	87,725			(3,062		)		84,663			174,727			(3,062		)		171,665
Operating expenses:
Cost of revenues (excluding amortization of internal use software)	28,411			18			(d)	28,429			59,671			18			(d)	59,689
Technology and development	11,157			(321		)	(e)	10,836			20,988			(321		)	(e)	20,667
Sales and marketing	14,385			(249		)	(f)	14,136			28,305			(249		)	(f)	28,056
General and administrative	17,130			(1,662		)	(g)	15,468			31,745			(1,662		)	(g)	30,083
Amortization, impairment and change in contingent consideration	11,695			3,669			(h)	15,364			19,140			3,669			(h)	22,809
Employee termination and other charges	313			—				313			313			—				313
Total operating expenses	83,091			1,455				84,546			160,162			1,455				161,617
Income (loss) from operations	4,634			(4,517		)		117			14,565			(4,517		)		10,048
Other income (expense):
Interest income	97			—				97			183			—				183
Interest expense	(409		)	(413		)	(i)	(822		)	(814		)	(413		)	(i)	(1,227		)
Other income (expense)	6			(132		)	(j)	(126		)	2			(132		)	(j)	(130		)
Income before income (loss) taxes	4,328			(5,062		)		(734		)	13,936			(5,062		)		8,874
Income tax (provision) benefit	(1,475		)	2,089				614			(5,287		)	2,089				(3,198		)
Net income (loss)	$	2,853		$	(2,973	)		$	(120	)	$	8,649		$	(2,973	)		$	5,676
Net income (loss) per share:
Basic	$	0.08		$	(0.08	)		$	—		$	0.24		$	(0.08	)		$	0.16
Diluted	$	0.08		$	(0.08	)		$	—		$	0.23		$	(0.08	)		$	0.15
Shares used in computing net income (loss) per share:
Basic	36,361							36,361			36,139							36,139
Diluted	37,195							36,361			36,862							36,862

(a)

Revenue adjustment of $2.5 million was primarily due to (i) a $1.1 million reversal of OPM revenue as discussed above, (ii) $0.7 million reversal of revenue as a result of the correction of billing errors and the recognition of invoices and related invoice adjustments in the proper reporting period, and (iii) a $0.6 million reversal of revenue due to the netting of healthcare revenue against certain cost of revenue expenses.


(b)	Revenue adjustment related to the correction of billing errors and the recognition of invoices and credit memos in the correct reporting periods.


(c)	Revenue adjustment of $0.7 million related to the correction of billing errors and the recognition of credit memos in the correct reporting periods.


(d)	Adjustment of $0.6 million primarily related to the reserve of potentially uncollectible customer obligations for pass through employee participant reimbursement, offset by a $0.6 million reversal related to the netting of healthcare revenue against certain cost of revenue expenses.


(e)	Reduction primarily related to the over-accrual of platform technology related expenses.


(f)	Reduction related primarily to the over-accrual of commission expenses.

(g)

Adjustments related to (i) a $1.2 million reduction in stock-based compensation expense as a result of reduced target attainment percentages expected for performance-based restricted stock units (see above for details), (ii) the reversal of $0.2 million related to the re-valuation of the allowance for bad debt and (iii) a $0.2 million expense reduction related to the re-valuation and write-off of customer obligations.


(h)	Adjustment related to the impairment charge of Internally Developed Software ("IDS") in connection with a joint development agreement with a customer as discussed above in the Internally Developed Software Impairment section.


(i)	Adjustment related to accrued interest expense on unreported employee participant and employer clients unclaimed property.


(j)	Adjustment related to accrued penalties on unreported employee participant and employer clients unclaimed property.

The following table presents the condensed consolidated balance sheet as previously reported, restatement adjustments and the condensed consolidated balance sheet as restated at June 30, 2016 (in thousands):



Condensed Consolidated Balance Sheets (Unaudited)
(In thousands)

	June 30, 2016
	As Previously Reported			Adjustments				As Restated
Assets
Current assets:
Cash and cash equivalents	$	568,993		$	(323	)	(a)	$	568,670
Restricted cash	332			—				332
Accounts receivable, net	93,979			(7,103		)	(b)	86,876
Prepaid expenses and other current assets	18,239			63			(c)	18,302
Total current assets	681,543			(7,363		)		674,180
Property and equipment, net	48,426			(3,123		)	(d)	45,303
Goodwill	157,109			—				157,109
Acquired intangible assets, net	90,769			—				90,769
Deferred tax assets	9,837			—				9,837
Other assets	4,275			(1		)		4,274
Total assets	$	991,959		$	(10,487	)		$	981,472
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and accrued expenses	$	71,399		$	(275	)	(e)	$	71,124
Customer obligations	468,153			(2,015		)	(f)	466,138
Other current liabilities	1,589			242			(g)	1,831
Total current liabilities	541,141			(2,048		)		539,093
Long-term debt	79,064			—				79,064
Other non-current liabilities	10,152			(2,060		)	(h)	8,092
Total liabilities	630,357			(4,108		)		626,249
Stockholders' Equity:
Common stock	38			—				38
Additional paid-in capital	368,519			(3,406		)	(i)	365,113
Treasury stock at cost	(14,374		)	—				(14,374		)
Retained earnings	7,419			(2,973		)		4,446
Total stockholders' equity	361,602			(6,379		)		355,223
Total liabilities and stockholders' equity	$	991,959		$	(10,487	)		$	981,472


(a)	Adjustment due to the timing differences between the obligation payments from employer clients and the receipt of cash in the Company's bank accounts, which resulted in a reclassification from cash and cash equivalents to customer obligations.

(b)

Adjustment relates to (i) a $4.1 million reduction in accounts receivable from the restatement of OPM revenue as discussed above, of which $1.1 million relates to the reduction of revenue and $3.0 million relates to the reduction of short-term and long-term deferred revenue, (ii) a $1.8 million reduction from the reclassification of accounts receivable to customer obligations based on the correction of the timing of customer billing and payments, and (iii) a $1.2 million decrease due to accruals to correct the recording of invoices, credit memos and billing adjustments in the proper period.


(c)	Adjustment primarily to record other receivables for the anticipated collection of commission over-payments.


(d)	Adjustments relates to the impairment charge for IDS of $3.7 million, as discussed above, partially offset by $0.6 million of assets under capital lease obligations originally recognized incorrectly as operating leases.

(e)

Adjustment relates to a $0.7 million reduction in short-term deferred revenue as result of the OPM restatement discussed above and a $0.4 million reduction due to the over accrual of operating expenses, partially offset by a $0.5 million accrual related to interest and penalties for unreported employee participant and employer clients unclaimed property, and a $0.3 million accrual for a customer cash refund related to billing errors.

(f)

Adjustment relates to (i) a $1.8 million decrease due to the reclassification of customer obligations from accounts receivable based on the correction of the timing of employer client billings and payments, (ii) a $0.3 million decrease due to the timing differences between the obligation payments from employer clients and the receipt of cash in the Company's bank accounts, which resulted in a reclassification from cash and cash equivalents to customer obligations, (iii) a $0.6 million decrease related to the re-valuation and write-off of customer obligations, and (iv) an increase of $0.7 million to record a reserve for potentially uncollectible customer obligations for pass-through employee participant reimbursements.


(g)	Adjustment to record the current portion of capital lease obligations originally recognized incorrectly as operating leases.


(h)	Adjustment relates to the reduction of long-term deferred revenue of $2.4 million in connection with the Company's OPM restatement as noted above, partially offset by an increase of $0.3 million related to the long-term portion of capital lease obligations originally reported incorrectly as operating leases.


(i)	Adjustment relates to a tax provision reduction of $2.1 million for the six months ended June 30, 2016 due to the reduction in net income as a result of the misstatements and a reduction in stock compensation of $1.3 million as a result of reduced target attainment percentages expected for performance-based restricted stock units.

The following table presents the Company's condensed consolidated statement of cash flows as previously reported, restatement adjustments and the condensed consolidated statement of cash flows as restated for the six months ended June 30, 2016 (in thousands):



Condensed Consolidated Statement of Cash Flows (Unaudited)
(In thousands)

	Six Months Ended June 30, 2016
	As Previously Reported			Adjustments			As Restated
Cash flows from operating activities:
Net income	$	8,649		$	(2,973	)	$	5,676
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation	3,813			78			3,891
Amortization, impairment and change in contingent consideration	19,042			3,835			22,877
Stock-based compensation expense	14,842			(1,318		)	13,524
Loss on disposal of fixed assets	199			—			199
Provision for doubtful accounts	996			(197		)	799
Deferred taxes	—			—			—
Excess tax benefit related to stock-based compensation arrangements	(5,287		)	2,088			(3,199		)
Changes in operating assets and liabilities:				—
Accounts receivable	(22,704		)	7,300			(15,404		)
Prepaid expenses and other current assets	302			(2,151		)	(1,849		)
Other assets	172			—			172
Accounts payable and accrued expenses	(1,848		)	(275		)	(2,123		)
Customer obligations	67,332			(2,015		)	65,317
Other liabilities	1,136			(2,331		)	(1,195		)
Net cash provided by operating activities	86,644			2,041			88,685
Cash flows from investing activities:
Purchases of property and equipment	(10,430		)	—			(10,430		)
Cash paid for acquisition of intangible assets	(14,259		)	—			(14,259		)
Net cash used in investing activities	(24,689		)	—			(24,689		)
Cash flows from financing activities:
Proceeds from exercise of common stock options	9,665			—			9,665
Proceeds from issuance of common stock under Employee Stock Purchase Plan	1,192			—			1,192
Payment of contingent consideration	(653		)	(97		)	(750		)
Payment for treasury stock acquired	(9,371		)	—			(9,371		)
Payment of capital lease obligations	—			(179		)	(179		)
Excess tax benefit related to stock-based compensation arrangements	5,287			(2,088		)	3,199
Net cash provided by financing activities	6,120			(2,364		)	3,756
Net increase in cash and cash equivalents	68,075			(323		)	67,752
Cash and cash equivalents at beginning of the year	500,918						500,918
Cash and cash equivalents at end of period	$	568,993		$	(323	)	$	568,670
Noncash financing and investing activities:
Property and equipment purchased under capital lease obligations	$	—		$	626		$	626

Cash, Cash Equivalents, and Restricted Cash

The Company considers all highly liquid investments with an original maturity of 90 days or less to be cash equivalents. Cash and cash equivalents, which consist of cash on deposit with banks and money market funds, are stated at cost, as well as commercial paper with an original maturity of less than 90 days. To the extent the Company’s contracts do not provide for any restrictions on the Company’s use of cash that it receives from clients, the cash is recorded as cash and cash equivalents.

The majority of the Company’s cash represents funding and pre-funding balances received from customers for which the Company has a corresponding current obligation. In all cases where we have collected cash from a customer but not fulfilled services, the Company recognizes a related liability to its customers, classified as customer obligations in the accompanying condensed consolidated balance sheets.

Restricted cash represents cash used to collateralize standby letters of credit.

Accounts Receivable

Accounts receivable represent both amounts receivable from customers in relation to fees for the Company’s services and unpaid amounts for benefit services provided by third-party vendors, such as transit agencies and healthcare providers for which the Company records a receivable for funding and a corresponding customer obligations liability until the Company disburses the balances to the vendors. The Company provides for an allowance for doubtful accounts by specifically identifying accounts with a risk of collectability and providing an estimate of the loss exposure. The Company reviews its allowance for doubtful accounts on a quarterly basis. Account balances are written off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. Write-offs for 2017, 2016 and 2015 were not significant.

The Company offsets on a customer by customer basis non-trade accounts receivable and customer obligation balances for financial reporting presentation on a product by product basis or otherwise contractually stated. Additionally, the Company offsets outstanding trade and non-trade receivables, including any debit or credit memos, against any prefund balances after plan year close or upon termination of services both based on the completion of a full reconciliation with the customer.

Impairment of Long-lived Assets

The Company reviews long-lived assets for indicators of impairment whenever events or changes in circumstances indicate that the carrying amounts of such assets may not be recoverable. An impairment of long-lived assets exists when the carrying amount of a long-lived asset group, exceeds its fair value. Such impairment arises in circumstances when such assets are assessed and determined to have no continuing or future benefit. Impairment losses are recorded when the carrying amount of the impaired asset group is not recoverable. Recoverability is determined by comparing the carrying amount of the asset or asset group to the undiscounted cash flows which are expected to be generated from its use. If the carrying amount of the asset group exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset or asset group exceeds its fair value. The Company did not record impairment losses related to long-lived assets in the years ended December 31, 2017 and 2015.

In 2016, the Company re-assessed the fair value of KP Connector which is an internal use software developed by the Company based on the specifications outlined in a client agreement. In the second quarter of 2016, the client notified the Company that it no longer required the services provided by the Company. Accordingly, the Company determined that KP Connector's carrying value was considered unrecoverable as of June 30, 2016, and recorded a $3.7 million impairment charge to amortization, impairment and change in contingent consideration expense in the condensed consolidated statements of income (loss) and a corresponding reduction of property and equipment, net, in the condensed consolidated balance sheets. The Company also reversed previously recorded amortization expenses in each of the second, third and fourth quarters of 2016. In addition, the Company accelerated amortization on intangible assets for client contracts and broker relationships of $3.8 million, triggered in the second quarter of 2016, related to the termination of a significant customer relationship in the health insurance exchange business.

Acquisitions, Goodwill and Definite lived Intangible Assets

The cost of an acquisition is allocated to the tangible assets and definite lived intangible assets acquired and liabilities assumed based on their fair value at the date of acquisition. Goodwill represents the excess cost over the fair value of net assets acquired in the acquisition and is not amortized, but rather is tested for impairment.

Definite lived intangible assets, consisting of client/broker contracts and relationships, trade names, technology, noncompete agreements and favorable lease arrangements, are stated at cost less accumulated amortization. All definite lived intangible assets are amortized on a straight-line basis over their estimated remaining economic lives, generally ranging from one to ten years. Amortization expense related to these intangible assets is included in amortization expense on the condensed consolidated statements of income (loss).

The Company performs a goodwill impairment test annually on December 31^st and more frequently if events and circumstances indicate that the asset might be impaired. The following are examples of triggering events that could indicate that the fair value of a reporting unit has fallen below the unit’s carrying amount:


•	A significant adverse change in legal factors or in the business climate


•	An adverse action or assessment by a regulator


•	Unanticipated competition


•	A loss of key personnel


•	A more likely than not expectation that a reporting unit or a significant portion of a reporting unit will be sold or otherwise disposed of

An impairment loss is recognized to the extent that the carrying amount exceeds the reporting unit’s fair value. When reviewing goodwill for impairment, the Company assesses whether goodwill should be allocated to operating levels lower than the Company’s single operating segment for which discrete financial information is available and reviewed for decision-making purposes. These lower levels are referred to as reporting units. The Company’s chief operating decision maker, the Chief Executive Officer, does not allocate resources or assess performance at the individual healthcare, commuter, COBRA or other revenue stream level, but rather at the operating segment level. Discrete financial information is therefore not maintained at the revenue stream level. The Company’s one reporting unit was determined to be the Company’s one operating segment.

Whenever events or circumstances change, entities have the option to first make a qualitative evaluation about the likelihood of goodwill impairment. In assessing the qualitative factors, the Company assesses relevant events and circumstances that may impact the fair value and the carrying amount of the reporting unit. The identification of relevant events and circumstances and how these may impact a reporting unit’s fair value or carrying amount involve significant judgments and assumptions. The judgment and assumptions include the identification of macroeconomic conditions, industry and market considerations, overall financial performance, Company specific events and share price trends and making the assessment on whether each relevant factor will impact the impairment test positively or negatively and the magnitude of any such impact.

The goodwill impairment analysis is a two-step process: first, the reporting unit’s estimated fair value is compared to its carrying value, including goodwill. If the Company determines that the estimated fair value of the reporting unit is less than its carrying value, the Company moves to the second step to determine the implied fair value of the reporting unit’s goodwill. If the carrying amount of the reporting unit’s goodwill exceeds its implied fair value, an impairment loss is recognized for any excess of the carrying amount of the reporting unit’s goodwill over the implied fair value of the reporting unit.

Fair Value of Financial Instruments

The Company’s financial assets and liabilities are recognized or disclosed at fair value in the financial statements on a recurring basis. The carrying amount of financial instruments approximates fair value because of their short maturity. The carrying amount of the Company’s variable rate debt approximates fair value.

The Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible. The Company determines fair value based on assumptions that market participants would use in pricing an asset or liability in the principal or most advantageous market. When considering market participant assumptions in fair value measurements, the following fair value hierarchy distinguishes between observable and unobservable inputs, which are categorized in one of the following levels:


•	Level 1 Inputs: Unadjusted quoted prices in active markets for identical assets or liabilities accessible to the reporting entity at the measurement date.


•	Level 2 Inputs: Other than quoted prices included in Level 1 inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the asset or liability.


•	Level 3 Inputs: Unobservable inputs for the asset or liability used to measure fair value to the extent that observable inputs are not available, thereby allowing for situations in which there is little, if any, market activity for the asset or liability at measurement date.

The contingent consideration payable related to the acquisition of Benefit Concepts, Inc. (“BCI”) was recorded at fair value on the acquisition date and is adjusted quarterly to fair value. The increases or decreases in the fair value of contingent consideration payable can result from changes in anticipated revenue levels and changes in assumed discount periods and rates. As the fair value measure is based on significant inputs that are not observable in the market, it is categorized as Level 3. The final contingent consideration for BCI was paid during the first quarter of 2016.

Other financial instruments not measured at fair value on the Company’s unaudited condensed consolidated balance sheets at June 30, 2016, but which require disclosure of their fair values include: cash and cash equivalents (including restricted cash), accounts receivable, accounts payable and accrued expenses, and debt under the revolving credit facility with certain lenders. The estimated fair value of such instruments at June 30, 2016 approximates their carrying value as reported on the condensed consolidated balance sheets. The fair value of all of these instruments are categorized as Level 2 of the fair value hierarchy, with the exception of cash, which is categorized as Level 1 due to its short-term nature.

The following table provides a reconciliation between the beginning and ending balances of items measured at fair value on a recurring basis that used significant unobservable inputs (Level 3) (in thousands):



	Contingent Consideration BCI
Balance at December 31, 2015	$	739
Gains or losses included in earnings:
Losses on revaluation of contingent consideration	11
Payment of contingent consideration	(750		)
Balance at June 30, 2016	$	—

The Company measures contingent consideration elements each reporting period at fair value and recognizes changes in fair value in earnings each period in the amortization, impairment and change in contingent consideration line item on the condensed consolidated statements of income (loss), until the contingency is resolved. Losses on revaluation of contingent consideration result from accretion charges due to the passage of time and fair value adjustments due to changes in forecasted revenue levels.

The Company recorded an immaterial charge for the change in fair value of the contingent consideration for the three months ended June 30, 2015, with no charge recorded for the three months ended June 30, 2016. The Company recorded $0.1 million and an immaterial charge for the six months ended June 30, 2015 and 2016, respectively, as a result of accretion charges due to the passage of time.

Customer Obligations Liability

Many of our customer agreements include provisions whereby our customer remit funds to us which represent prefunds of employer / client and employee participant contributions related to FSA, HRA and commuter programs. The agreements do not represent restricted cash and accordingly the amounts received are included in cash and cash equivalents on our consolidated balance sheets with a corresponding liability recorded as customer obligations. Our customers generally provide us with prefunds for their FSA and HRA programs based on a percentage of projected spending by the employee participants for the plan year and other factors. In the case of our commuter program, at the beginning of each month we receive prefunds based on the employee participants’ monthly elections. These prefunds are typically replenished throughout the year by our FSA, HRA and commuter clients as benefits are provided under these programs.

Recently Issued Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”) which supersedes existing accounting literature relating to how and when a company recognizes revenue. Under ASU 2014-09, a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods and services. Additionally, the guidance requires improved disclosures to help users of financial statements better understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The new standard allows for either a full retrospective with or without practical expedients or a retrospective with a cumulative catch-up on adoption transition method. In July 2015, the FASB deferred the effective date for annual reporting periods beginning after December 15, 2017 (including interim reporting periods within those periods) in ASU 2015-14. Early adoption is permitted to the original effective date for periods beginning after December 15, 2016 (including interim reporting periods within those periods). The Company is in the process of determining which transition method it will use and what impact, if any, the adoption of ASU 2014-09 will have on its condensed consolidated financial statements and related disclosures.

Subsequent to the issuance of ASU 2014-09, the FASB has issued several ASUs such as ASU 2016-08, Revenue from Contracts with Customers: Principal versus Agent Considerations (Reporting Revenue Gross versus Net), ASU 2016-10, FASB Accounting Standards Codification - Consensuses of the FASB Emerging Issues Task Force, and ASU 2016-12, Revenue from Contracts with Customers: Narrow-Scope Improvements and Practical Expedients among others. These ASUs do not change the core principle of the guidance stated in ASU 2014-09; instead, these amendments are intended to clarify and improve operability of certain topics included within the revenue standard. These ASUs had the same effective date and transition requirements as ASU 2014-09, the Company is evaluating the impact this standard will have on its condensed consolidated financial statements and related disclosures.

In April 2015, the FASB issued Accounting Standards Update No. 2015-05, Customer's Accounting for Fees Paid in a Cloud Computing Arrangement (“ASU 2015-05”). ASU 2015-05 provides guidance to customers about whether a cloud computing arrangement includes a software license. If a cloud computing arrangement includes a software license, then the customer should account for the software license element of the arrangement consistent with the acquisition of other software license. If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract. The guidance will not change U.S. GAAP for a customer's accounting for service contracts. The Company adopted ASU 2015-05 in the first quarter of 2016. The adoption of ASU 2015-05 did not have a material impact on the condensed consolidated financial statements and related disclosures.

In February 2016, the FASB issued Accounting Standards Update No. 2016-02, Leases, (“ASU 2016-02”). Under the new guidance, lessees will be required to recognize a lease liability and a right-of-use asset for all leases (with the exception of short-term leases) at the commencement date. The ASU is effective for fiscal years and interim periods within those years beginning after December 15, 2018, with early adoption permitted. The new standard is required to be applied with a modified retrospective approach to each prior reporting period presented with various optional practical expedients. The Company is currently assessing what impact, if any, the adoption of this ASU will have on its condensed consolidated financial statements and related disclosures.

In March 2016, the FASB issued Accounting Standard Update No. 2016-04, Recognition of Breakage for Certain Prepaid Stored-Value Products, (“ASU 2016-04”). The new guidance creates an exception under ASC 405-20, Liabilities-Extinguishments of Liabilities, to derecognize financial liabilities related to certain prepaid stored-value products using a revenue-like breakage model. The new guidance is effective for fiscal years and interim periods within those years beginning after December 15, 2017, with early adoption permitted. This guidance can be applied either retrospectively to each period presented or as a cumulative-effect adjustment as of the date of adoption. The Company elected to not early adopt ASU 2016-09 and will reflect the impact in the subsequent year condensed consolidated financial statements and related disclosures.

In March 2016, the FASB issued ASU No. 2016-09, Compensation-Stock Compensation: Improvements to Employee Share-Based Payment Accounting, (“ASU 2016-09”). The updated guidance changes how companies account for certain aspects of share-based payment awards to employees, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statement of cash flows. The update to the standard is effective for fiscal years and interim periods within those years beginning after December 15, 2016, with early adoption permitted. The Company elected to not early adopt ASU 2016-09, and will reflect the impact in the subsequent year condensed consolidated financial statements and related disclosures.