SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The accompanying condensed consolidated financial statements are prepared in accordance with the generally accepted accounting principles in the United States (“GAAP”) for interim financial information and instructions to the Quarterly Report on Form 10-Q. The condensed consolidated financial statements, including these notes, are unaudited and exclude some of the disclosures required in annual financial statements. Management believes it has made all necessary adjustments so that the condensed consolidated financial statements are presented fairly and that estimates made in preparing its condensed consolidated financial statements are reasonable and prudent. The operating results presented for interim periods are not necessarily indicative of the results that may be expected for any other interim period or for the entire year. These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements included in the Annual Report on Form 10-K for the year ended December 31, 2017 filed with the SEC.

The condensed consolidated financial statements include the accounts and activities of the AOG entities, their consolidated subsidiaries and certain Consolidated Funds. These Consolidated Funds include certain Ares-affiliated funds, related co-investment entities and collateralized loan obligations (“CLOs”) (collectively, the “Consolidated Funds”) managed by Ares Management LLC (“AM LLC”) and its wholly owned subsidiaries. Including the results of the Consolidated Funds significantly increases the reported amounts of the assets, liabilities, revenues, expenses and cash flows in the accompanying condensed consolidated financial statements; however, the Consolidated Funds results included herein have no direct effect on the net income attributable to controlling interests or on total controlling equity. Instead, economic ownership interests of the investors in the Consolidated Funds are reflected as non-controlling interests in Consolidated Funds in the accompanying condensed consolidated financial statements. Further, cash flows allocable to non-controlling interest in Consolidated Funds are specifically identifiable in the Condensed Consolidated Statements of Cash Flows. All intercompany balances and transactions have been eliminated upon consolidation.

The Company has reclassified certain prior period amounts to conform to the current year presentation.

Adoption of ASC 606

Effective January 1, 2018, the Company adopted the Financial Accounting Standards Board (“FASB”) Topic 606 (“ASC 606”), Revenue from Contracts with Customers. The Company adopted ASC 606 to all applicable contracts under the modified retrospective approach using the practical expedient provided for within paragraph 606-10-65-1(f)(3); therefore, the presentation of prior year periods has not been adjusted. The Company recognized the cumulative effect of initially adopting ASC 606 as an adjustment to the opening balance of components of equity as of January 1, 2018.

Pursuant to ASC 606, the Company recognizes revenue in a way that depicts the transfer of 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 or services. Under this standard, revenue is based on a contract with a determinable transaction price and distinct performance obligations with probable collectability. Revenues cannot be recognized until the performance obligation(s) are satisfied and control is transferred to the customer. The Company's adoption of ASC 606 impacted the timing and recognition of incentive fees in the Company’s consolidated statements of operations. The adoption of ASC 606 did not have an impact on the Company’s management fees, administrative fees, transaction fees or other fees. The details of the significant changes and quantitative impact of the adoption of ASC 606 are further discussed below.

The adoption of ASC 606 had the following impact on the Company’s revenue streams:



Revenues of the Company	Impact of ASC 606
Management fees	No Impact - Management fees are recognized as revenue in the period advisory services are rendered.
Performance income - Carried interest allocation	No impact. See discussion below for change in accounting policy.
Performance income - Incentive fees	See discussion below for impact.
Administrative, transaction and other fees	No Impact - Administrative, transaction and other fees are recognized as revenue in the period in which the related services are rendered.

Performance Income

Performance income consists of carried interest and incentive fees.

Carried Interest

In certain fund structures, typically in private equity and real estate equity funds, carried interest is allocated to the Company based on cumulative fund performance to date, subject to the achievement of minimum return levels in accordance with the respective terms set out in each fund’s governing documents. At the end of each reporting period, a fund will allocate carried interest applicable to the Company based upon an assumed liquidation of that fund's net assets on the reporting date, irrespective of whether such amounts have been realized. Carried interest is recorded to the extent such amounts have been allocated, and may be subject to reversal to the extent that the amount allocated ultimately exceeds the amount due to the Company based on a fund’s cumulative investment returns.

Carried interest is realized when an underlying investment is profitably disposed of and the fund’s cumulative returns are in excess of the specific hurdle rates as defined in the applicable governing documents. Since carried interest is subject to reversal, the Company may need to accrue for potential repayment of previously received carried interest. This accrual represents all amounts previously distributed to the Company that would need to be repaid to the funds if the funds were to be liquidated based on the current fair value of the underlying funds’ investments as of the reporting date. The actual repayment obligations, however, generally do not become realized until the end of a fund’s life. As of March 31, 2018 and December 31, 2017, the Company had no accrued contingent repayment obligations that would need to be paid if the funds were liquidated at fair value at the reporting dates.

Prior to January 1, 2018, the Company accounted for carried interest under Method 2 described in ASC 605-20-S99-1, which provides guidance on accounting for incentive-based performance income, including carried interest. Since Method 2 is no longer available following the adoption of ASC 606, the Company has reassessed its accounting policy for carried interest, and has determined that carried interest is within scope of ASC 323, Investments-Equity Method and Joint Ventures, and out of scope under the scoping provision of ASC 606. Therefore, following the election of ASC 323, the Company accounted for carried interest, which represents a performance-based capital allocation from an investment fund to the Company, as earnings from financial assets within the scope of ASC 323. Accordingly, the Company recognizes carried interest allocation as a separate revenue line item in the Condensed Consolidated Statements of Operations. Uncollected carried interest as of the reporting date is recorded within investments in the Condensed Consolidated Statements of Financial Condition.

The Company has applied the change in accounting principle on a full retrospective basis, and prior periods presented have been recast to conform with the current period's presentation. The change in accounting principle did not change the timing or the amount of carried interest recognized. Instead, the change in accounting principle resulted in reclassification from performance income to carried interest allocation, and therefore did not have any impact on net income. See the tables below for the impact of the change in accounting principle of carried interest under ASC 323.

Incentive Fees

Incentive fees earned on the performance of certain fund structures, typically in credit funds, are recognized based on the fund’s performance during the period, subject to the achievement of minimum return levels in accordance with the respective terms set out in each fund’s investment management agreement. Incentive fees are realized at the end of a measurement period, typically annually. Once realized, such fees are no longer subject to reversal.

Prior to January 1, 2018, the Company accounted for incentive fees under Method 2 as described above. However, the accounting for incentive fees is separate and distinct from the accounting for carried interest because the incentive fees are contractual fee arrangements and do not represent allocations of returns from partners' capital accounts. Upon the adoption of ASC 606, the Company accounts for incentive fees in accordance with ASC 606. Accordingly, the Company will recognize incentive fee revenue only when the amount is realized and no longer subject to reversal. Therefore, the Company will no longer recognize unrealized incentive fees in revenues in the condensed consolidated financial statements. The adoption of ASC 606 results in the delayed recognition of unrealized incentive fees in the condensed consolidated financial statements until they become realized at the end of the measurement period, which is typically annually.

The Company adopted ASC 606 for incentive fees using the modified retrospective approach with effective date of January 1, 2018. The cumulative effect of the adoption resulted in the reversal of $22.6 million of unrealized incentive fees and is presented as a reduction to the opening balances of components of equity as of January 1, 2018.

The following tables present the adjustments made in connection with the Company's change in accounting principle related to carried interest under ASC 323, Investments-Equity Method and Joint Ventures on the financial statement line items for the periods presented in the condensed consolidated financial statements:



Condensed Consolidated Statement of Financial Condition

	As of December 31, 2017
	As Previously Reported		Adjustments				As Adjusted
	(audited)
Assets
Investments ($1,077,236 of accrued carried interest, and $0 of pledged collateral)	$	647,335	$	1,077,236			$	1,724,571
Performance income receivable	1,099,847		(1,099,847		)		—
Other assets	107,730		22,611			(1)	130,341


(1)	Unrealized incentive fees receivable balance as of December 31, 2017.



Condensed Consolidated Statement of Operations

	For the Three Months Ended March 31, 2017
	As Previously Reported		Adjustments			As Adjusted

Revenues
Performance fees	$	55,172	$	(55,172	)	$	—
Carried interest allocation	—		52,007			52,007
Incentive fees	—		3,165			3,165
Principal investment income	—		2,587			2,587
Total revenues	241,657		2,587			244,244
Other income (expense)
Net realized and unrealized gain on investments	2,655		(1,767		)	888
Interest and dividend income	2,744		(820		)	1,924

The Company's change in accounting policy related to carried interest under ASC 323 did not impact the Condensed Consolidated Statements of Comprehensive Income, Condensed Consolidated Statements of Changes in Equity or Condensed Consolidated Statements of Cash Flows for the year ended December 31, 2017.

The following tables present the impact of incentive fees on the condensed consolidated financial statements upon the adoption of ASC 606 effective January 1, 2018:



	As of January 1, 2018
	As adjusted December 31, 2017		Adjustments				As Adjusted for ASC 606 adoption
Investments	$	1,724,571	$	—			$	1,724,571
Other assets	130,341		(22,611		)	(1)	107,730
Total assets	8,563,522		(22,611		)		8,540,911
Total liabilities	7,103,230		—				7,103,230
Cumulative effect adjustment to equity(2)	—		(22,611		)		(22,611		)
Total equity	1,460,292		(22,611		)		1,437,681
Total liabilities, non-controlling interests and equity	8,563,522		(22,611		)		8,540,911


(1)	Unrealized incentive fees receivable balance as of December 31, 2017.


(2)	See detail below.

Condensed Consolidated Statement of Changes in Equity



	Preferred Equity		Shareholders' Capital			Accumulated Other Comprehensive Loss			Non-controlling interest in Ares Operating Group Entities			Non-Controlling Interest in Consolidated Funds		Total Equity
Balance at December 31, 2017	$	298,761	$	279,065		$	(4,208	)	$	358,186		$	528,488	$	1,460,292
Cumulative effect of the adoption of ASC 606	—		(10,827		)	—			(17,117		)	5,333		(22,611		)
As adjusted balance at January 1, 2018	$	298,761	$	268,238		$	(4,208	)	$	341,069		$	533,821	$	1,437,681

In accordance with the ASC 606 disclosure requirements, the following tables present the adjustments made by the Company to remove the effects of adopting ASC 606 on the condensed consolidated financial statements as of and for the three months ended March 31, 2018:



Condensed Consolidated Statement of Financial Condition

	As of March 31, 2018
	As Reported			Adjustments			Balances without adoption of ASC 606
Assets
Deferred tax asset, net	$	50,986		$	(250	)	$	50,736
Other assets	105,187			23,704			128,891
Total assets	8,560,082			23,454			8,583,536
Commitments and contingencies
Non-controlling interest in Consolidated Funds	544,380			(7,052		)	537,328
Non-controlling interest in Ares Operating Group entities	348,820			18,803			367,623
Controlling interest in Ares Management, L.P.:
Shareholders' equity (97,514,500 shares issued and outstanding)	377,235			11,603			388,838
Accumulated other comprehensive loss, net of tax	(4,001		)	100			(3,901		)
Total controlling interest in Ares Management, L.P	373,234			11,703			384,937
Total equity	1,565,195			23,454			1,588,649
Total liabilities and equity	8,560,082			23,454			8,583,536



Condensed Consolidated Statement of Operations

	For the Three Months Ended March 31, 2018
	As Reported			Adjustments			Balances without adoption of ASC 606
Revenues
Incentive fees	$	5,071		$	856		$	5,927
Total revenues	266,089			856			266,945
Other income (expense)
Other income (expense), net	(311		)	(12		)	(323		)
Total other income	2,240			(12		)	2,228
Income before taxes	62,046			844			62,890
Income tax benefit	(12,375		)	250			(12,125		)
Net income	74,421			594			75,015
Net income attributable to Ares Management, L.P.	40,948			594			41,542
Net income attributable to Ares Management, L.P. common shareholders	35,523			594			36,117

Condensed Consolidated Statement of Comprehensive Income



	Three Months Ended March 31, 2018
	As Reported		Adjustments			Balances without adoption of ASC 606

Net income	$	74,421	$	594		$	75,015
Other comprehensive income:
Foreign currency translation adjustments	5,485		249			5,734
Total comprehensive income	79,906		843			80,749
Less: Comprehensive income attributable to non-controlling interests in Consolidated Funds	3,542		(1,719		)	1,823
Less: Comprehensive income attributable to non-controlling interests in Ares Operating Group entities	35,209		1,686			36,895
Comprehensive income attributable to Ares Management, L.P.	$	41,155	$	876		$	42,031

Condensed Consolidated Statement of Cash Flows



	For the Three Months Ended March 31, 2018
	As Reported			Adjustments			Balances without adoption of ASC 606

Cash flows from operating activities:
Net income	$	74,421		$	594		$	75,015
Cash flows due to changes in operating assets and liabilities	(37,718		)	(2,313		)	(40,031		)
Cash flows due to changes in operating assets and liabilities allocable to non-controlling interests in Consolidated Funds	(88,592		)	1,719			(86,873		)

Recent Accounting Pronouncements

The Company considers the applicability and impact of all FASB ASUs issued. ASUs not listed below were assessed and either determined to be not applicable or expected to have minimal impact on the Company's condensed consolidated financial statements.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The objective of the guidance in ASU 2016-02 is to increase transparency and comparability among organizations by recognizing lease assets and liabilities in the balance sheet and disclosing key information. ASU 2016-02 amends previous lease guidance, which required a lessee to categorize and account for leases as either operating leases or capital leases, and instead requires a lessee to recognize a lease liability and a right-of-use asset on the entity’s balance sheet for all leases with terms that exceed one year. The lease liability and right-of-use asset are to be carried at the present value of remaining expected future lease payments. The guidance should be applied using a modified retrospective approach. ASU 2016-02 is effective for public entities for annual reporting periods beginning after December 15, 2018 and interim periods within those reporting periods, with early adoption permitted. The Company is currently compiling all leases and right–of–use terms to evaluate the impact of this guidance on its condensed consolidated financial statements.

In January 2018, the FASB issued ASU 2018-02, Income Statement-Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. ASU 2018-02 allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from Public Law No. 115-97 (the “Tax Cuts and Jobs Act”). Consequently, the amendments eliminate the stranded tax effects resulting from the Tax Cuts and Jobs Act and will improve the usefulness of information reported to financial statement users. However, because the amendments only relate to the reclassification of the income tax effects of the Tax Cuts and Jobs Act, the underlying guidance that requires that the effect of a change in tax laws or rates be included in income from continuing operations is not affected. This ASU also requires certain disclosures about stranded tax effects. ASU 2018-02 is effective for all entities for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted, including adoption in any interim period, (1) for public business entities for reporting periods for which financial statements have not yet been issued and (2) for all other entities for reporting periods for which financial statements have not yet been made available for issuance. The guidance should be applied either in the period of adoption or retrospectively to each period (or periods) in which the effect of the change in the U.S. federal corporate income tax rate in the Tax Cuts and Jobs Act is recognized. The Company adopted ASU 2018-02 in the the three months ended March 31, 2018. As a result of the adoption of ASU 2018-02, $1.2 million of stranded tax effects resulting from the Tax Cuts and Jobs Act were reclassified from accumulated other comprehensive income to shareholders' equity during the three months ended March 31, 2018.