NOTE 2. Summary of Significant Accounting Policies and Recent Accounting Pronouncements

Summary of Significant Accounting Policies

Principles of Consolidation and Basis of Presentation

The Consolidated Financial Statements include the accounts of DigitalGlobe, Inc. and its subsidiaries. Intercompany accounts and transactions have been eliminated in consolidation. The Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). Certain prior period amounts were reclassified to conform to the current period presentation.

Use of Estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts of assets and liabilities at the reporting date, and amounts of revenue and expenses during the periods presented. Due to the inherent uncertainties in making estimates, actual results could differ from those estimates and such differences may be material to the Consolidated Financial Statements.

Revenue Recognition

Revenue is recognized when the following criteria have been met: persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the fee is fixed or determinable and the collection of funds is reasonably assured. The Company records deferred revenue when it receives payments in advance of the delivery of products or the performance of services.

The Company enters into certain revenue arrangements that consist of multiple deliverables of its products and services. Multiple deliverable arrangements relate primarily to the EnhancedView Contract with the United States National Geospatial Intelligence Agency (“NGA”), value-added services and the Company’s Direct Access Program (“DAP”), discussed in detail below. The Company allocates arrangement consideration to the deliverables on the basis of their relative selling prices. In such circumstances, the Company uses a hierarchy to determine the selling prices to be used for allocating revenue: (i) vendor-specific objective evidence of fair value (“VSOE”), (ii) third-party evidence of selling price (“TPE”) and (iii) best estimate of the selling price (“BESP”). The Company uses BESP to allocate revenue as it has been unable to establish VSOE or TPE due to the unique nature of its products and services and lack of visibility into competitor pricing.

The Company’s revenue is primarily generated from: (i) the Company’s EnhancedView Contract with the NGA and various value-added service arrangements awarded under the EnhancedView Contract, (ii) DAP revenue, (iii) the licensing of imagery and imagery-related products and (iv) certain other arrangements as described in further detail below.

EnhancedView Contract – The EnhancedView Contract contains multiple deliverables, including a service level agreement (“EnhancedView SLA”), infrastructure enhancements and other services. The Company determined that these deliverables do not qualify as separate units of accounting due to a lack of standalone value. The Company recognizes revenue for this single unit of accounting using a proportional performance method.

Under this method, revenue is recognized based on satellite capacity made available to the NGA in a particular period compared to the total capacity to be made available over the term of the contract. Capacity made available (and revenue) has increased over the term of the arrangement as a result of the installation of additional remote ground terminals and the October 1, 2014 commissioning of WorldView-3. Each monthly EnhancedView SLA payment is subject to a performance penalty depending upon the Company’s performance against pre-defined performance criteria. Revenue in the amount of any performance penalty is deferred when assessed and recognized when mutually agreeable future products or services are delivered.

Value-added services awarded under the EnhancedView Contract – From time to time, the NGA awards certain contracts for value-added services whereby the Company meets NGA’s more advanced imagery requirements. The largest such arrangement is Global Enhanced GEOINT Delivery (“Global EGD”), which provides for the delivery of certain orthorectified imagery and imagery-related products and services. Revenue is recognized for this multiple element arrangement as the Company’s contractual obligations are satisfied. Due to the nature of some of the Company’s obligations under this contract, certain consideration is being deferred and recognized over the term of the EnhancedView Contract.

NextView Revenue – In connection with the Company’s NextView agreement with the NGA (the predecessor contract to the EnhancedView Contract), the Company received $266.0 million to offset the construction costs of WorldView-1, which was recorded as deferred revenue when received. When WorldView-1 was placed into service in November 2007, the Company began recognizing the deferred revenue on a straight-line basis over the estimated useful life of the WorldView-1 satellite (“NextView amortization”), the period over which the NGA is expected to benefit from this payment.

DAP - DAP arrangements generally include construction of the direct access facility, access to the satellites to task and download imagery and facility maintenance services. The facility is generally delivered at the beginning of the contractual period of performance and access and maintenance services span over one or several years. DAP arrangements are typically assessed as multiple element arrangements. Revenue related to satellite access is recognized as minutes are consumed by the customer, while maintenance revenue is recognized ratably over the maintenance period. The DAP facility does not have standalone value without the ongoing access service. Therefore, any up-front fees related to the facility are recorded as deferred revenue and amortized ratably over the estimated customer relationship period, for which the useful life of the longest-lived satellite accessed by the customer is generally used.

Licensing of Imagery – Revenue is recognized for imagery licenses depending on the nature of how the imagery is delivered and whether the Company has a continuing obligation. Revenue is typically recognized when the customer is able to directly download the imagery or when imagery is physically delivered to the customer, provided that all other revenue recognition criteria have been met. If the Company has a continuing obligation to refresh previously delivered imagery, the Company allocates a portion of the contractual consideration to the separate deliverables on the basis of their relative selling prices and recognizes the allocated revenue as delivery occurs. Revenues related to online imagery subscriptions that do not allow for the download of imagery are generally recognized ratably over the subscription period.

Reseller Revenue – The Company maintains a vast network of both domestic and foreign reseller partners who sell its products and services to end users. Revenue under these arrangements is generally recognized net of any reseller discounts as the products and services are delivered to the reseller, provided all other revenue recognition criteria have been met.

Services Revenue – Services products use the Company’s geospatial and military intelligence expertise to deliver insight to customers through the creation of analytic applications, such as geospatial risk intelligence reports. These services are typically contracted for on a time and materials basis, where revenue is recognized on the basis of time plus reimbursable costs incurred during the period.

Cash and Cash Equivalents

All highly liquid investments with maturities of three months or less at the date of purchase are classified as cash equivalents. The Company’s cash equivalents primarily consist of demand deposit money market accounts. Restricted cash primarily consists of contractually restricted amounts under certain of the Company’s lease agreements as well as performance and warranty bonds used in the ordinary course of business to support the Company’s obligations to customers under certain DAP contracts.

Allowance for Doubtful Accounts

The Company estimates an allowance for doubtful accounts for its receivables based on historical experience, aging analysis, credit quality of its customers, current economic conditions and other factors that may affect its customers’ ability to pay.

Deferred Contract Costs

The Company defers certain costs incurred in the construction or significant upgrade of direct access facilities built for DAP customers, consisting of hardware, software and labor. The deferred contract costs are generally recognized as cost of revenue over the same period as the related deferred revenue arising from up-front payments for the DAP facility, which is the estimated customer relationship period. When deferred contract costs are in excess of related deferred revenues, the excess costs are recognized over the initial contract period.

The Company capitalized certain internal support costs and other expenditures reimbursable under the NextView agreement incurred in the construction and development of its WorldView-1 satellite and related ground systems. These costs were not capitalized as fixed assets, but were accounted for as deferred contract costs. When WorldView-1 was placed into service, the Company began amortizing the related deferred contract costs ratably over the expected life of the satellite, the same period over which NextView revenues are being recognized.

Income Taxes

Deferred tax assets and liabilities are recognized for the estimated future tax effects attributable to the temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases as well as operating loss and tax credit carryforwards. The effect on deferred tax assets and liabilities of a change in enacted tax laws is recognized as an adjustment to the tax provision or benefit in the period of enactment. Valuation allowances are established to reduce deferred tax assets to the amount that will more likely than not be realized. To the extent that a determination is made to establish or adjust a valuation allowance, the expense or benefit is recorded in the period in which the determination is made.

The calculation of tax assets and liabilities involves uncertainties in the application of complex tax regulations. For income tax benefits to be recognized, a tax position must be more likely than not to be sustained upon examination by taxing authorities. The Company records reserves for uncertain tax positions that do not meet this criteria.

Property and Equipment

Property and equipment, including internal use software, are recorded at cost. Property and equipment acquired in a business combination are recorded at their fair value at the date of acquisition. Repair and maintenance costs are expensed as incurred. Significant improvements that extend the useful life or add functionality are capitalized. Depreciation is recognized once an asset is placed in service on a straight-line basis over the estimated useful life of the related asset. Leasehold improvements are amortized over the shorter of the lease term or their estimated useful lives.

Satellite costs associated with the design, construction, launch and commissioning phases of the satellite are capitalized. The Company capitalizes interest, launch insurance and in-orbit insurance costs that are incurred during these periods. Insurance costs incurred after a satellite is placed into service are recognized as expense ratably over the related policy periods and are included in selling, general and administrative costs.

The costs to construct and test ground systems, which are primarily comprised of hardware and software and allow for communication with the Company’s satellites, are also capitalized. Costs related to the Company’s satellites are included in construction in progress until in-orbit testing is complete and the satellite is placed into service. The Company depreciates the cost of a satellite once it is placed into service over its estimated useful life using the straight-line method of depreciation, as the Company anticipates that the satellite will provide consistent levels of imagery over its estimated useful life.

In certain instances, the Company may construct a satellite but choose to store it for a period of time prior to launch. When a satellite is placed into storage, storage costs and all other incremental costs that result from placing the satellite into storage will be expensed as incurred. Capitalization of interest will cease during the period in which the satellite is in storage and during which no additional enhancements are being made. When the satellite is removed from storage in preparation for launch, incremental costs incurred to launch the satellite and perform in-orbit testing will be capitalized, as these costs are necessary to place the satellite into service.

The Company reviews the expected useful life of its satellites annually, or if events or circumstances indicate an earlier reevaluation is required. When an adjustment is made to the estimated useful life of a satellite, the remaining carrying amount of the satellite is depreciated prospectively over its adjusted remaining useful life.

Valuation of Long-Lived Assets

Property and equipment and other long-lived assets are tested for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. The Company measures recoverability by comparing the carrying amount to the projected cash flows the assets are expected to generate. An impairment loss is recognized to the extent that carrying value exceeds fair value.

If a satellite were to fail during launch or while in orbit, the resulting loss would be charged to expense in the period it is determined that the satellite is not recoverable. The amount of any such loss would be reduced to the extent of insurance proceeds estimated to be received.

Goodwill

Goodwill represents the excess of purchase price over the fair value of net assets acquired in a business combination. Goodwill is tested annually in the fourth quarter for impairment at the reporting unit level, or more frequently if events or changes in circumstances indicate that the carrying amount of a reporting unit may not be recoverable.

When analyzing goodwill for impairment, the Company may perform a qualitative assessment (commonly referred to as “step zero”) or it may bypass the step zero analysis and perform the two-step impairment analysis. If the step zero analysis indicates that it is more likely than not that the fair value of a reporting unit is less than its carrying value, then the Company would perform the two-step goodwill impairment analysis. The first step compares the fair value of the reporting unit, including its goodwill, to its carrying value. In estimating the fair value of a reporting unit, the Company typically uses a discounted cash flow analysis and corroborates it with market-based information. If the carrying value of the reporting unit exceeds its fair value, then the second step is performed to determine the amount of goodwill impairment, if any.

Intangible Assets

Intangible assets, identified as customer relationships, technology, trademarks, U.S. Federal Communications Commission licenses and other, are recorded at fair value at the time of acquisition. Intangible assets are amortized over their estimated useful lives. Amortization is generally recorded using the straight-line method, which approximates the expected pattern of economic benefit.

Fair Values of Financial Instruments

The fair value guidance establishes a three-level valuation hierarchy for disclosure of fair value measurements based on the transparency of inputs to the valuation of an asset or liability as of the measurement date. A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.

Level 1 — quoted prices (unadjusted) for identical assets or liabilities in active markets.

Level 2 — quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.

Level 3 — unobservable inputs when little or no market data is available.

The carrying value for cash and cash equivalents, receivables, other current assets, accounts payable, and accrued liabilities approximates fair value. Fair value of long-term debt is estimated using inputs that incorporate certain active market quotations for similar, but not identical, assets based upon trading activity among lenders as well as other indirect inputs.

Share-Based Compensation

Share-based compensation, including grants of employee stock options and restricted stock-based awards, is measured at the grant date based on the fair value of the award. The Company estimates the fair value of stock options on the grant date using a Black-Scholes valuation model. Share-based compensation for restricted stock awards (“RSAs”) and restricted stock units (“RSUs”) is measured based on the closing fair market value of the Company’s common stock on the date of grant. For performance stock units (“PSUs”), vesting is contingent upon the achievement of certain performance metrics. Grants with internal financial performance metrics are measured based on the closing price of the Company’s stock on the date of grant, and grants with external market-based metrics are valued using a Monte Carlo simulation. The Company recognizes share-based compensation cost on a straight-line basis over the award’s requisite service period.

Recent Accounting Pronouncements

Recently Adopted Accounting Standards


Standard		Description and Impact on the Financial Statements
ASU 2016-15, Statement of Cash Flows (Topic 230):Classification of Certain Cash Receipts and Cash Payments		This standard is intended to reduce diversity in practice with respect to the presentation and classification of certain cash receipts and payments in the statement of cash flows. It addresses eight cash flow classification issues including: debt prepayment or extinguishment costs, settlement of certain debt instruments, contingent consideration payments made after a business combination, proceeds from the settlement of certain insurance claims and distributions received from equity method investees. The standard is effective for fiscal years beginning after December 15, 2017 and interim periods therein. The Company early adopted this standard in the fourth quarter of 2016 on a retrospective basis. As a result of adoption, the Company has presented $28.0 million of debt modification and extinguishment costs as financing cash outflows in the Consolidated Statements of Cash Flows for the year ended December 31, 2016. These debt modification and extinguishment costs would previously have been presented as operating cash outflows. There were no other impacts as a result of adopting this standard.
ASU 2015-17, Balance Sheet Classification of Deferred Taxes		This standard requires an entity to classify all deferred tax liabilities and assets as non-current on the balance sheet instead of separating deferred taxes into current and non-current amounts. The standard is effective for fiscal years beginning after December 15, 2016 and interim periods therein. The Company early adopted this standard in the first quarter of 2016 on a retrospective basis. Adoption of this standard did not have a material effect on the Company’s Consolidated Financial Statements. As a result of adoption, the Company has retrospectively adjusted the previously issued December 31, 2015 Consolidated Balance Sheet to facilitate comparison among periods by reclassifying current deferred tax assets as a direct deduction to non-current deferred tax liabilities, decreasing current deferred tax assets and non-current deferred tax liabilities by $11.9 million.

Standards Not Yet Adopted



Standard		Description and Impact on the Financial Statements
ASU 2014-09, Revenue from Contracts with Customers (Topic 606)		In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (“Topic 606”), a new revenue recognition model that will replace nearly all existing revenue recognition guidance under U.S. GAAP. Under Topic 606, revenue is recognized when a customer obtains control of promised goods or services in an amount that reflects the consideration which the entity expects to receive in exchange for those goods or services. Topic 606 requires disclosure of the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The Company is planning to adopt Topic 606, including several amendments issued by the FASB, on January 1, 2018. The new standard permits i) retrospective adoption, under which each prior reporting period presented will be presented as if the new standard had always been applied, or ii) adoption by recognizing the cumulative effect of applying the guidance to all prior activity at the date of initial application. We currently anticipate adopting the standard using the full retrospective method; however our ability to do so is dependent on system readiness and whether we have the information necessary to apply Topic 606 to prior periods. We are still in the process of evaluating the effects of adopting Topic 606. However, we have completed our initial review of the EnhancedView Contract, NextView Agreement, and DAP contracts. Revenue from these sources represented 66.4% of our revenue in 2016. While we have not quantified the effects of anticipated changes to reflect Topic 606, a summary of our initial conclusions is as follows: • U.S. Government – We expect the recognition of NextView amortization to differ because we believe the EnhancedView Contract would be considered a modification to the NextView Agreement. This is expected to result in NextView amortization being recognized as capacity is provided to the NGA over the term of the EnhancedView Contract as opposed to being recognized straight-line over the estimated useful life of WorldView-1. • DAP – Under Topic 606, customer facility payments are expected to be recognized over the life of the contract, rather than recognized over the estimated useful life of the longest-lived satellite accessed by the customer. In addition, while direct incremental costs incurred in the construction of the facility will continue to be deferred under the new standard, the period over which we recognize these costs may change. We will continue our evaluation of Topic 606 (including how it may impact other customer contracts) and the resulting impact to the Consolidated Financial Statements through the date of adoption.
ASU 2016-02, Leases (ASC Topic 842)		This standard requires lessees to recognize most leases on their balance sheets as lease liabilities with corresponding right-of-use assets. The new guidance also requires additional disclosure regarding leasing arrangements. This standard requires the use of a modified retrospective transition method and is effective for the Company beginning January 1, 2019. Early adoption is permitted. The Company is currently evaluating the effect that ASU 2016-02 will have on its Consolidated Financial Statements and related disclosures.
ASU 2016-09, Improvements to Employee Share-Based Payment Accounting		This standard requires all income tax effects of awards to be recognized in the income statement when the awards vest or are settled. It also allows an employer to repurchase more of an employee's shares for tax withholding purposes without triggering liability accounting, and to make a policy election to account for forfeitures as they occur. The Company adopted ASU 2016-09 on January 1, 2017, and does not expect the standard to have a material impact on its Consolidated Financial Statements and related disclosures.

ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash		This standard is intended to reduce the diversity in practice that exists in the classification and presentation of changes in restricted cash on the statement of cash flows. The standard will require that a statement of cash flows explain the change during the period in the total cash, cash equivalents and amounts generally described as restricted cash or restricted-cash equivalents. Therefore, amounts generally described as restricted cash and restricted-cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The Company adopted ASU 2016-18 on January 1, 2017, and does not expect the standard to have a material impact on its Consolidated Financial Statements.