SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Business

Monolithic Power Systems, Inc. (“MPS” or the “Company”) was incorporated in the State of California on

August

22,

1997.

November

17,

2004,

the Company was reincorporated in the State of Delaware. MPS designs, develops and markets integrated power semiconductor solutions and power delivery architectures. MPS's mission is to provide innovative power solutions in consumer, industrial, computing and storage, and communications market segments.

Basis of Presentation

The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. Intercompany accounts and transactions have been eliminated in consolidation.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“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 reported amounts of revenue and expenses during the reporting period. Significant estimates and assumptions used in these consolidated financial statements primarily include those related to revenue recognition, inventory valuation, valuation of share-based awards, valuation of goodwill and acquisition-related intangible assets, contingencies and tax valuation allowances. Actual results could differ from those estimates.

Certain Significant Risks and Uncertainties

Financial instruments which potentially subject the Company to concentrations of credit risk consist primarily of cash and cash equivalents, short-term and long-term investments and accounts receivable. The Company’s cash consists of checking and savings accounts. The Company’s cash equivalents include short-term, highly liquid investments purchased with remaining maturities at the date of purchase of

three

months or less. The Company’s short-term investments consist of certificates of deposit, corporate debt securities, government agency bonds and treasuries, and the long-term investments consist of government-backed student loan auction-rate securities. The Company generally does not require its customers to provide collateral or other security to support accounts receivable. To manage credit risk, management performs ongoing credit evaluations of its customers’ financial condition. The Company requires cash in advance for certain customers in addition to ongoing credit evaluations for those where credit has been extended. Accounts receivable allowances were not material in any of the periods presented.

The Company participates in the dynamic high technology industry and believes that changes in any of the following areas could have a material adverse effect on its future financial position, results of operations or cash flows: advances and trends in new technologies and industry standards; competitive pressures in the form of new products or price reductions on current products; changes in product mix; changes in the overall demand for products offered by the Company; changes in

third

-party manufacturers; changes in key suppliers; changes in certain strategic relationships or customer relationships; litigation or claims against the Company based on intellectual property, patent, product, regulatory or other factors; fluctuations in foreign currency exchange rates; risk associated with changes in government policies and regulations on trade restrictions and corporate taxes; availability of necessary components or sub-assemblies; availability of foundry capacity; ability to integrate acquired companies; and the Company’s ability to attract and retain employees necessary to support its growth.

Foreign Currency

In general, the functional currency of the Company’s international subsidiaries is the local currency. The primary subsidiaries are located in China and Taiwan, which utilize the Renminbi and the New Taiwan Dollar as their currencies, respectively. Accordingly, assets and liabilities of the foreign subsidiaries are translated using exchange rates in effect at the end of the period. Revenue and costs are translated using average exchange rates for the period. The resulting translation adjustments are presented as a separate component of accumulated other comprehensive income (loss) in stockholders’ equity in the Consolidated Balance Sheets. In addition, the Company incurs foreign currency exchange gains or losses related to certain intercompany transactions between the U.S. and its foreign subsidiaries that are denominated in a currency other than the functional currency.

In connection with the settlement and remeasurement of the balances, the Company recorded gains of

$0.1

million,

$0.6

million and

$0.1

million for the years ended

December

31,

2016,

2015

and

2014,

respectively, which were

reported in interest and other income, net, in the Consolidated Statements of Operations.

Cash and Cash Equivalents

The Company classifies all highly liquid investments with stated maturities of

three

months or less from date of purchase as cash equivalents.

Fair Value of Financial Instruments

Fair value is estimated by applying the following hierarchy, which prioritizes the inputs used to measure fair value into

three

levels and bases the categorization within the hierarchy upon the lowest level of input that is available and significant to the fair value measurement:

Level

Quoted prices (unadjusted) for identical assets or liabilities in active markets

Level

Inputs other than the quoted prices in active markets that are observable either directly or indirectly

Level

Significant unobservable inputs

The Company’s financial instruments include cash and cash equivalents, and short-term and long-term investments. Cash equivalents are stated at cost, which approximates fair market value. The Company’s short-term and long-term investments are classified as available-for-sale securities and are stated at their fair market value. Premiums and discounts are amortized or accreted over the life of the related available-for-sale securities. Interest income is recognized when earned.

The Company determines whether an impairment is temporary or other-than temporary. Unrealized gains or losses that are deemed to be temporary are recorded as a component of accumulated other comprehensive income (loss) in stockholders’ equity in the Consolidated Balance Sheets, and changes in unrealized gains or losses are recorded in the Consolidated Statements of Comprehensive Income. The Company records an impairment charge in interest and other income, net, in the Consolidated Statements of Operations when an available-for-sale investment has experienced a decline in value that is deemed to be other-than-temporary. Other-than-temporary impairment exists when the Company either has the intent to sell the security, it will more likely than not be required to sell the security before anticipated recovery, or it does not expect to recover the entire amortized cost basis of the security.

As of

December

31,

2016

and

2015,

the fair value of the Company’s holdings in auction-rate securities was

$5.4

million, all of which was classified as long-term available-for-sale investments. The valuation of the auction-rate securities is subject to fluctuations in the future, which will depend on many factors, including the quality of the underlying collateral, estimated time to liquidity including potential to be called or restructured, underlying final maturity, insurance guaranty and market conditions, among others.

Inventories

Inventories are stated at the lower of standard cost (which approximates actual cost determined on a

first

-in

first

-out basis) or current market value. Market is based on estimated net realizable value. The Company writes down excess and obsolete inventory based on its age and forecasted demand, which includes estimates taking into consideration the Company’s outlook on market and economic conditions, technology changes, new product introductions and changes in strategic direction. Actual demand

may

differ from forecasted demand, and such differences

may

have a material effect on recorded inventory values. When the Company records a write-down on inventory, it establishes a new, lower cost basis for that inventory, and subsequent changes in facts and circumstances will not result in the restoration or increase in that newly established cost basis.

Property and Equipment

Property and equipment are stated at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the assets. Buildings and building improvements have estimated useful lives of

years. Leasehold improvements are amortized over the shorter of the estimated useful lives or the lease period. Production equipment and software have estimated useful lives of

three

seven

years. Transportation equipment has estimated useful lives of

years. Furniture and fixtures have estimated useful lives of

three

five

years. Land is not depreciated.

Goodwill and Acquisition-Related Intangible Assets

Goodwill represents the excess of the fair value of purchase consideration over the fair value of net tangible and identified intangible assets as of the date of acquisition. In-process research and development (“IPR&D”) assets represent the fair value of incomplete R&D projects that had not reached technological feasibility as of the date of acquisition. The IPR&D assets are initially capitalized at fair value as intangible assets with indefinite lives and assessed for impairment at each reporting period. When the IPR&D projects are completed, they are reclassified as amortizable intangible assets and are amortized over their estimated useful lives. Alternatively, if the IPR&D projects are abandoned, they are impaired and expensed to research and development.

Acquisition-related intangible assets with finite lives consist of know-how and developed technologies. These assets are amortized on a straight-line basis over the estimated useful lives of

three

five

years and the amortization expense is recorded in cost of revenue in the Consolidated Statements of Operations.

Impairment of Long-Lived Assets

The Company evaluates its long-lived assets other than goodwill for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset

may

not be recoverable. An impairment loss would be recognized when the sum of the undiscounted future net cash flows expected to result from the use of the asset and its eventual disposition is less than its carrying amount. Such impairment loss would be measured as the difference between the carrying amount of the asset and its fair value based on the present value of estimated future cash flows.

The Company tests goodwill for impairment at least annually in the

fourth

quarter of the year, or whenever events or changes in circumstances indicate that goodwill

may

be impaired. The Company has elected to

first

assess the qualitative factors to determine whether it is more likely than not that the fair value of the reporting unit is less than its carrying amount. If the Company determines that it is more likely than not that its fair value is less than the carrying amount, then the

two

-step goodwill impairment test is performed. The

first

step compares the fair value of the reporting unit with its carrying amount. If the carrying amount exceeds its fair value, the

second

step measures the impairment loss by comparing the implied fair value of the goodwill with the carrying amount. No impairment of goodwill has been identified in any of the periods presented.

Other Long-Term Assets

Other assets primarily consist of investments related to the employee deferred compensation plan, intangible assets for the land use rights in Chengdu, China, certain prepaid wafer purchases and purchased patents. The Company amortizes the land use rights over

years and the purchased patents over

five

years.

Deferred Compensation Plan

The Company has a non-qualified, unfunded deferred compensation plan, which provides certain key employees, including executive management, with the ability to defer the receipt of compensation in order to accumulate funds for retirement on a tax deferred basis. The Company does not make contributions to the plan or guarantee returns on the investments. The Company is responsible for the plan’s administrative expenses. Participants’ deferrals and investment gains and losses remain as the Company’s liabilities and the underlying assets are subject to claims of general creditors.

The liabilities for compensation deferred under the plan are recorded at fair value in each reporting period. Changes in the fair value of the liabilities are recorded as an operating expense (credit) in the Consolidated Statements of Operations. The Company manages the risk of changes in the fair value of the liabilities by electing to match the liabilities with investments in corporate-owned life insurance policies and mutual funds that offset a substantial portion of the exposure. The investments are recorded at the cash surrender value of the corporate-owned life insurance policies and at the fair value of the mutual funds, which are classified as trading securities. Changes in the cash surrender value of the corporate-owned life insurance policies and the fair value of mutual fund investments are included in interest and other income, net in the Consolidated Statements of Operations. The following table summarizes the deferred compensation plan amounts in the Consolidated Balance Sheets (in thousands):

	December 31,
	2016		2015
Cash surrender value of corporate-owned life insurance policies	$	8,180	$	5,706
Fair value of mutual funds		12,108		8,279
Total deferred compensation plan assets	$	20,288	$	13,985

Deferred compensation plan assets reported in:
Other long-term assets	$	20,288	$	13,985

Deferred compensation plan liabilities reported in:
Accrued compensation and related benefits (short-term)	$	479	$	-
Other long-term liabilities		19,836		14,147
Total	$	20,315	$	14,147

Warranty Reserves

The Company generally provides a

one

two

-year warranty against defects in materials and workmanship and will either repair the goods or provide replacement products at no charge to the customer for defective products. Reserve requirements are recorded in the period of sale and are based on an assessment of the products sold with warranty and historical warranty costs incurred. Historically, the warranty expenses have not been material to the Company’s consolidated financial statements.

Revenue Recognition

The Company recognizes revenue when the following

four

basic criteria are met:

(1)

persuasive evidence of an arrangement exists;

(2)

delivery has occurred or services have been rendered;

(3)

the fee is fixed or determinable; and

(4)

collectability is reasonably assured. Determination of criteria

(3)

and

(4)

are based on management’s judgment regarding the fixed nature of the fees charged for products delivered and the collectability of those fees. The application of these criteria has resulted in the Company generally recognizing revenue upon shipment (when title and risk of loss have transferred to customers), including to most of the distributors, original equipment manufacturers and electronic manufacturing service providers.

For the years ended

December

31,

2016,

2015

and

2014,

approximately

88%,

88%

and

89%

of the Company’s sales, respectively, were made through distribution arrangements with

third

parties. The Company generally recognizes revenue upon shipment of products to the distributors based on the following considerations:

	(1)	The price is fixed or determinable at the date of sale. The Company does not offer special payment terms (the Company’s normal payment terms are 30 - 45 days for its distributors) or price adjustments to distributors when the Company recognizes revenue upon shipment.
	(2)	The distributors are obligated to pay the Company and this obligation is not contingent on the resale of the Company’s products.
	(3)	The distributors’ obligation is unchanged in the event of theft or physical destruction or damage to the products.
	(4)	The distributors have stand-alone economic substance apart from the Company’s relationship.
	(5)	The Company does not have any obligations for future performance to directly bring about the resale of its products by the distributors.
	(6)	The amount of future returns can be reasonably estimated. The Company has the ability and the information necessary to track inventory sold to and held at its distributors. The Company maintains a history of returns and has the ability to estimate the stock rotation returns on a quarterly basis.

Certain of the Company’s large distributors have contracts that include limited stock rotation rights that permit the return of a small percentage of the previous

six

months’ purchases. The Company maintains a sales reserve for stock rotation rights, which is based on historical experience of actual stock rotation returns on a per distributor basis and information related to products in the distribution channel. This reserve is recorded at the time of sale. As of

December

31,

2016

and

2015,

the reserve for stock rotation rights was

$1.9

million and

$2.4

million, respectively.

If the Company enters into arrangements with distributors that have price adjustment or other rights that are not fixed or determinable, the Company recognizes revenue under such arrangements only after the distributors have sold the products to end customers, at which time the price is no longer subject to adjustment and is fixed, and the products are no longer subject to return except pursuant to warranty terms.

A small number of the Company’s U.S. distributors has such rights and accordingly, the Company defers revenue recognition on these shipments until the products are sold to the end customers by the distributors. The deferred revenue balance before the final price and other adjustments from these distributors as of

December

31,

2016

and

2015

was

$3.7

million and

$2.8

million, respectively. The deferred costs as of

December

31,

2016

and

2015

were

$0.3

million and

$0.2

million, respectively.

Stock-Based Compensation

The Company measures the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award.

The fair value of restricted stock units (“RSUs”) with service conditions or performance conditions is based on the grant date share price. The fair value of RSUs with market conditions, as well as RSUs containing both market conditions and performance conditions, is estimated using a Monte Carlo simulation model. The fair value of stock options, shares issued under the employee stock purchase plan and RSUs with a purchase price feature is estimated using the Black-Scholes model.

The Company recognizes compensation expense equal to the grant-date fair value for all share-based payment awards that are expected to vest. Compensation expense related to awards with service conditions is recorded on a straight-line basis over the requisite service period. Compensation expense related to awards subject to market conditions or performance conditions is recognized over the requisite service period for each separately vesting tranche. For awards with only market conditions, compensation expense is not reversed if the market conditions are not satisfied. For awards with performance conditions, as well as awards containing both market conditions and performance conditions, the Company recognizes compensation expense when it becomes probable that the performance criteria set by the Board of Directors will be achieved. Management performs the probability assessment on a quarterly basis by reviewing external factors, such as macroeconomic conditions and the analog industry forecasts, and internal factors, such as the Company’s business and operations strategy, product roadmaps and revenue forecasts. Changes in the probability assessment of achievement of the performance conditions are accounted for in the period of change by recording a cumulative catch-up adjustment as if the new estimate had been applied since the service inception date. Any previously recognized compensation expense is reversed if the performance conditions are not expected to be satisfied.

The Company recognized stock-based compensation expense less an estimate for forfeitures. Effective

January

2017,

the Company elected to account for forfeitures when they occur upon the adoption of Accounting Standards Update (“ASU”) No.

2016

(see “Recent Accounting Pronouncements” for further discussion).

Research and Development

Costs incurred in research and development are expensed as incurred.

Accounting for Income Taxes

The Company recognizes federal, state and foreign current tax liabilities or assets based on its estimate of taxes payable or refundable in the current fiscal year by tax jurisdiction. The Company also recognizes federal, state and foreign deferred tax assets or liabilities for its estimate of future tax effects attributable to temporary differences and carryforwards. The Company records a valuation allowance to reduce any deferred tax assets by the amount of any tax benefits that, based on available evidence and judgment, are not expected to be realized.

The Company’s calculation of current and deferred tax assets and liabilities is based on certain estimates and judgments and involves dealing with uncertainties in the application of complex tax laws. The Company’s estimates of current and deferred tax assets and liabilities

may

change based, in part, on added certainty or finality or uncertainty to an anticipated outcome, changes in accounting or tax laws in the U.S. or foreign jurisdictions where the Company operates, or changes in other facts or circumstances. In addition, the Company recognizes liabilities for potential U.S. and foreign income tax for uncertain income tax positions taken on its tax returns if it has less than a

50%

likelihood of being sustained. If the Company determines that payment of these amounts is unnecessary or if the recorded tax liability is less than its current assessment, the Company

may

be required to recognize an income tax benefit or additional income tax expense in its financial statements in the period such determination is made. The Company has calculated its uncertain tax positions which were attributable to certain estimates and judgments primarily related to transfer pricing, cost sharing and its international tax structure exposure.

Litigation and Contingencies

The Company is a party to actions and proceedings in the ordinary course of business, including potential litigation regarding its shareholders and its intellectual property, challenges to the enforceability or validity of its intellectual property, claims that the Company’s products infringe on the intellectual property rights of others, and employment matters. The pending proceedings involve complex questions of fact and law and will require the expenditure of significant funds and the diversion of other resources to prosecute and defend. In addition, from time to time, the Company becomes aware that it is subject to other contingent liabilities. When this occurs, the Company will evaluate the appropriate accounting for the potential contingent liabilities to determine whether a contingent liability should be recorded. In making this determination, management

may,

depending on the nature of the matter, consult with internal and external legal counsel and technical experts. Based on the facts and circumstances in each matter, the Company uses its judgment to determine whether it is probable that a contingent loss has occurred and whether the amount of such loss can be estimated. If the Company determines a loss is probable and estimable, the Company records a contingent loss. In determining the amount of a contingent loss, the Company takes into account advice received from experts for each specific matter regarding the status of legal proceedings, settlement negotiations, prior case history and other factors. Should the judgments and estimates made by management need to be adjusted as additional information becomes available, the Company

may

need to record additional contingent losses. Alternatively, if the judgments and estimates made by management are adjusted, for example, if a particular contingent loss does not occur, the contingent loss recorded would be reversed.

Litigation expense (benefit), net in the Consolidated Statements of Operations includes primarily patent infringement litigation and other business matters. The Company records litigation costs in the period in which they are incurred. Proceeds resulting from settlement of litigation or favorable judgments are recorded as a reduction against litigation expense.

Net Income per Share

Basic net income per share is computed by dividing net income by the weighted-average number of common shares outstanding for the period. Diluted net income per share reflects the potential dilution that would occur if outstanding securities or other contracts to issue common stock were exercised or converted into common stock, and calculated using the treasury stock method. Contingently issuable shares, including equity awards with performance conditions or market conditions, are considered outstanding common shares and included in the basic net income per share as of the date that all necessary conditions to earn the awards have been satisfied. Prior to the end of the contingency period, the number of contingently issuable shares included in the diluted net income per share is based on the number of shares, if any, that would be issuable under the terms of the arrangement at the end of the reporting period.

The Company’s outstanding RSUs contain forfeitable rights to receive cash dividend equivalents, which are accumulated and paid to the employees when the underlying RSUs vest. Dividend equivalents accumulated on the underlying RSUs are forfeited if the employees do not fulfill their service requirement and the awards do not vest. Accordingly, these awards are not treated as participating securities in the net income per share calculation.

Comprehensive Income

Comprehensive income represents the change in the Company’s net assets during the period from non-owner sources. Accumulated other comprehensive income (loss) presented in the Consolidated Balance Sheets primarily consists of unrealized gains and losses related to available-for-sale investments and foreign currency translation adjustments.

Recent Accounting Pronouncements

Stock

-Based

Compensation:

March

2016,

the Financial Accounting Standards Board (“FASB”) issued ASU No.

2016

09,

Compensation—Stock Compensation (Topic

718):

Improvements to Employee Share-Based Payment Accounting,

which changes how entities account for certain aspects of share-based payment awards, including the accounting for excess tax benefits and tax deficiencies, forfeitures, statutory tax withholding requirements, as well as classification of excess tax benefits in the statements of cash flows. The standard is effective for annual reporting periods beginning after

December

15,

2016.

The manner of application varies by the different provisions of the guidance, with certain provisions applied on a retrospective or modified retrospective approach, while others are applied prospectively. The Company adopted the standard on

January

2017

and the primary impact of the adoption on its Consolidated Financial Statements is as follows:

●

The Company elected to account for forfeitures of equity awards when they occur. The change was applied on a modified retrospective basis with a cumulative-effect adjustment of approximately

$5.1

million to retained earnings as of

January

2017.

	●	All excess tax benefits and deficiencies will be recognized in the income tax provision in the Consolidated Statements of Operations prospectively, rather than in additional paid-in-capital in the Consolidated Balance Sheets. In addition, the standard eliminates the requirement to defer recognition of excess tax benefits until they are realized through a reduction to income taxes payable. The Company applied the modified retrospective method and there was no adjustment to retained earnings as of January 1, 2017, as the deferred tax assets would be fully offset by a valuation allowance.

●

The Company will present excess tax benefits as an operating activity in the Consolidated Statements of Cash Flows on a prospective basis. In addition, the Company will present cash payments made to tax authorities in connection with shares withheld to meet statutory tax withholding requirements as a financing activity in the Consolidated Statements of Cash Flows on a retrospective basis.

Revenue Recognition:

May

2014,

the FASB issued ASU No.

2014

09,

Revenue from Contracts with Customers (Topic

606),

which outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers. The standard’s core principle is that an entity will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.

The standard defines a

five

-step process in order to achieve this core principle and requires expanded qualitative and quantitative disclosures relating to the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers, including significant judgments and estimates used by management. The standard will be effective for annual reporting periods beginning after

December

15,

2017.

Early adoption is permitted for reporting periods beginning after

December

15,

2016.

The Company does

not plan to early adopt, and accordingly, the Company will adopt the new standard effective

January

2018.

While the Company continues to assess the new standard on its accounting policies, processes and system requirements, the primary impact includes the timing of recognition of revenue with certain distributors in the U.S. Currently, sales to these distributors are made under agreements which provide these distributors with price adjustment and other rights. The Company determines that uncertainties on the sales price exist under these arrangements primarily because the amount of price adjustments to be claimed by the distributors is not fixed or determinable. As a result, revenue and costs related to these sales are deferred until the Company receives notification from the distributors that products have been sold to the end customers and the amount of price adjustments is finalized. Under the new standard, the transaction price takes into consideration the effect of variable consideration, which is estimated at the time the promised goods are transferred to the customers. Accordingly, the Company will be required to recognize revenue at the time of shipments to the distributors, adjusted for an estimate of the price adjustments based on the information available at the time. This change will only impact the Company's accounting for arrangements with certain distributors in the U.S. Revenue from non-U.S. distributors, which make up the majority of the total distributor sales, is currently recognized at the time of shipments to the distributors because these arrangements do not contain price adjustments, or other amounts that are not fixed or determinable.

The new standard permits adoption either by using (i) a full retrospective approach for all periods presented in the period of adoption or (ii) a modified retrospective approach with the cumulative effect of initially applying the new standard recognized at the date of initial application and providing certain additional disclosures. A final decision regarding the adoption method has not been finalized at this time.

While the Company continues to assess the potential impact of the provisions in the new standard, including the areas described above, the Company cannot reasonably estimate quantitative information related to the impact of the new standard on its financial statements at this time.

Others:

February

2016,

the FASB issued ASU No.

2016

02,

Leases (Topic

842),

which requires entities to recognize a right-of-use asset and a lease liability on the balance sheets for substantially all leases with a lease term greater than

months, including leases currently accounted for as operating leases. The standard requires modified retrospective adoption and will be effective for annual reporting periods beginning after

December

15,

2018,

with early adoption permitted. The Company is evaluating the impact of the adoption on its consolidated financial position, results of operations, cash flows and disclosures.

June

2016,

the FASB issued ASU No.

2016

13,

Financial Instruments – Credit Losses (Topic

326):

Measurement of Credit Losses on Financial Instruments,

which introduces a model based on expected losses to estimate credit losses for most financial assets and certain other instruments. In addition, for available-for-sale debt securities with unrealized losses, the losses will be recognized as allowances rather than reductions in the amortized cost of the securities. The standard will be effective for annual reporting periods beginning after

December

15,

2019,

with early adoption permitted for annual reporting periods beginning after

December

15,

2018.

Entities will apply the standard by recording a cumulative-effect adjustment to retained earnings. The Company is evaluating the impact of the adoption on its consolidated financial position, results of operations, cash flows and disclosures.

January

2017,

the FASB issued ASU No.

2017

04,

Intangibles – Goodwill and Other (Topic

350):

Simplifying the Accounting for Goodwill Impairment,

which simplifies the accounting for goodwill impairment. The guidance removes step

two

of the goodwill impairment test, which requires a hypothetical purchase price allocation. A goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. Entities will continue to have the option to perform a qualitative assessment to determine if a quantitative impairment test is necessary. The standard will be applied prospectively, and is effective for annual reporting periods beginning after

December

15,

2019.

Early adoption is permitted after

January

2017.

The Company is evaluating the impact of the adoption on its annual goodwill impairment test.