Summary of Significant Accounting Policies

Consolidation

The consolidated financial statements reflect the accounts of the Company and its wholly-owned subsidiaries. All intercompany profits, transactions and balances have been eliminated. Investments in significant non-controlled entities are accounted for either by using the equity method or cost method of accounting.

Reclassifications

Certain amounts in the prior years’ consolidated financial statements have been reclassified to conform to the current year presentation.

Use of Estimates

The Company’s consolidated financial statements are prepared in conformity with U.S. generally accepted accounting principles (“GAAP”) which require 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 consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Cash, Cash Equivalents and Restricted Cash

Cash, cash equivalents and restricted cash include all highly liquid investments with a maturity of three months or less at the time of purchase.

The sale of the Superior Refinery resulted in restricted cash as of December 31, 2017 and was based upon the value of collateral under the Company’s debt agreements. Under the indentures governing the Company’s senior notes, proceeds from Asset Sales (as defined in the indentures) can only be used for, among other things, to repay, redeem or repurchase debt; to make certain acquisitions or investments; and to make capital expenditures. On April 9, 2018, the Company redeemed all of the 2021 Secured Notes using both the restricted cash from the sale of the Superior Refinery and other unrestricted cash.

Accounts Receivable

The Company performs periodic credit evaluations of customers’ financial condition and generally does not require collateral. Accounts receivable are carried at their face amounts. The Company maintains an allowance for doubtful accounts for estimated losses in the collection of accounts receivable. The Company makes estimates regarding the future ability of its customers to make required payments based on historical experience, the age of the accounts receivable balances, credit quality of its customers, current economic conditions, expected future trends and other factors that may affect customers’ ability to pay. Individual accounts are written off against the allowance for doubtful accounts after all reasonable collection efforts have been exhausted.

The activity in the allowance for doubtful accounts was as follows (in millions):



	December 31,
	2019			2018			2017
Beginning balance	$	1.5		$	7.0		$	0.9
Provision	(0.5		)	1.2			6.1
Write-offs, net	(0.1		)	(6.7		)	—
Ending balance	$	0.9		$	1.5		$	7.0

Inventories

The cost of inventory is recorded using the last-in, first-out (“LIFO”) method. Costs include crude oil and other feedstocks, labor, processing costs and refining overhead costs. Inventories are valued at the lower of cost or market value. The replacement cost of these inventories, based on current market values, would have been $17.7 million higher and $7.8 million lower as of December 31, 2019 and 2018, respectively. At December 31, 2019 and 2018, the Company had $1.9 million and $1.0 million, respectively, of inventory consigned to others.

On March 31, 2017 and June 19, 2017, the Company sold inventory comprised of crude oil and refined products to Macquarie Energy North America Trading Inc. (“Macquarie”) under Supply and Offtake Agreements as described in Note 9 — “Inventory Financing Agreements” related to the Great Falls and Shreveport refineries, respectively. The crude oil remains in the legal title of Macquarie and is stored in the Company’s refinery storage tanks governed by storage agreements. Legal title to the crude oil passes to the Company at the storage tank outlet. After processing, Macquarie takes title to the refined products stored in the Company’s storage tanks until sold to third parties. While title to certain inventories will reside with Macquarie, the Supply and Offtake Agreements are accounted for by the Company similar to a product financing arrangement; therefore, the inventories sold to Macquarie will continue to be included in the Company’s consolidated balance sheets until processed and sold to a third party. The Company is obligated to repurchase the inventory in certain scenarios.

Inventories consist of the following (in millions):



	December 31, 2019						December 31, 2018
	Titled Inventory		Supply & Offtake Agreements ⁽¹⁾		Total		Titled Inventory		Supply & Offtake Agreements ⁽¹⁾		Total
Raw materials	$	48.3	$	11.6	$	59.9	$	30.2	$	22.2	$	52.4
Work in process	35.0		29.1		64.1		39.7		19.2		58.9
Finished goods	124.8		43.8		168.6		128.9		43.9		172.8
	$	208.1	$	84.5	$	292.6	$	198.8	$	85.3	$	284.1


⁽¹⁾	Amounts represent LIFO value and do not necessarily represent the value at which the inventory was sold. Please read Note 9 - “Inventory Financing Agreements” for further information.

Under the LIFO inventory method, the most recently incurred costs are charged to cost of sales and inventories are valued at the earliest acquisition costs. For the year ended December 31, 2019, the Company recorded a decrease (exclusive of lower of cost or market (“LCM”) adjustments) of $6.0 million in cost of sales in the consolidated statements of operations due to the liquidation of inventory layers. For the years ended December 31, 2018 and 2017, the Company recorded increases (exclusive of LCM adjustments) of $6.3 million and $3.7 million, respectively, in cost of sales in the consolidated statements of operations due to the liquidation of inventory layers.

In addition, the use of the LIFO inventory method may result in increases or decreases to cost of sales in years that inventory volumes decline as the result of charging cost of sales with LIFO inventory costs generated in prior periods. In periods of rapidly declining prices, LIFO inventories may have to be written down to market value due to the higher costs assigned to LIFO layers in prior periods. During the year ended December 31, 2019, the Company recorded a decrease in cost of sales in the consolidated statements of operations of $35.6 million due to the LCM valuation. During the year ended December 31, 2018, the Company recorded an increase in cost of sales in the consolidated statements of operations of $30.6 million as compared to a decrease of $30.6 million as of December 31, 2017, due to the sale of inventory previously adjusted through the LCM valuation.

Derivatives

The Company is exposed to fluctuations in the price of numerous commodities, such as crude oil (its principal raw material), as well as the sales prices of gasoline, diesel and jet fuel. Given the historical volatility of commodity prices, these fluctuations can significantly impact sales, gross profit and net income. Therefore, the Company utilizes derivative instruments primarily to minimize its price risk and volatility of cash flows associated with the purchase of crude oil and the sale of fuel products. The Company employs various hedging strategies and does not hold or issue derivative instruments for trading purposes. For further information, please read Note 11.

On a regular basis, the Company enters into commodity contracts with counterparties for the purchase or sale of crude oil, blendstocks and various finished products. These contracts usually qualify for the normal purchase / normal sale exemption under ASC 815 and, as such, are not measured at fair value.

Property, Plant and Equipment

Property, plant and equipment are stated on the basis of cost. Depreciation is calculated using the straight-line method over the estimated useful lives. Assets under finance leases are amortized over the lesser of the useful life of the asset or the term of the lease.

Property, plant and equipment, including depreciable lives, consisted of the following (in millions):



	December 31,
	2019			2018
Land	$	8.3		$	10.6
Buildings and improvements (10 to 40 years)	37.4			36.8
Machinery and equipment (10 to 20 years)	1,607.3			1,641.7
Furniture, fixtures and software (5 to 10 years)	47.9			48.3
Assets under finance leases (1 to 7 years) ⁽¹⁾	10.3			21.9
Construction-in-progress	19.9			23.7
	1,731.1			1,783.0
Less accumulated depreciation	(757.6		)	(684.9		)
	$	973.5		$	1,098.1


⁽¹⁾	Assets under finance leases consist of buildings and machinery and equipment. As of December 31, 2019 and 2018, finance lease assets are recorded net of accumulated amortization of $7.1 million and $6.7 million, respectively.

Under the composite depreciation method, the cost of partial retirements of a group is charged to accumulated depreciation. However, when there are dispositions of complete groups or significant portions of groups, the cost and related accumulated depreciation are retired, and any gain or loss is reflected in earnings.

During 2019, 2018 and 2017, the Company incurred $135.1 million, $156.3 million and $185.2 million, respectively, of interest expense of which $0.5 million, $0.8 million and $2.1 million, respectively, was capitalized as a component of property, plant and equipment.

The Company periodically assesses its operations and legal requirements to determine if recognition of an asset retirement obligation is necessary. The Company has not recorded an asset retirement obligation as of December 31, 2019 or 2018 given the timing of any retirement and related costs are currently indeterminable.

During the years ended December 31, 2019, 2018 and 2017, the Company recorded $92.4 million, $98.1 million and $130.0 million, respectively, of depreciation expense on its property, plant and equipment. Depreciation expense included $1.4 million, $2.3 million and $3.9 million for the years ended 2019, 2018 and 2017, respectively, related to the Company’s finance lease assets.

The Company capitalizes the cost of computer software developed or obtained for internal use. Capitalized software is amortized using the straight-line method over five years. As of December 31, 2019 and 2018, the Company had $42.5 million and $42.6 million, respectively, of capitalized software costs. As of December 31, 2019 and 2018, the Company had $23.1 million and $15.7 million, respectively, of accumulated depreciation related to the capitalized software costs. During the years ended December 31, 2019, 2018 and 2017, the Company recorded $7.4 million, $8.0 million and $3.3 million, respectively, of amortization expense on capitalized computer software.

Investment in Unconsolidated Affiliates

The Company accounts for its ownership in Biosyn Holdings, LLC (“Biosyn”) under the equity method of accounting. The initial cash investment made by the Company in Biosyn was expensed given Biosyn’s operations were all related to research and development. In March 2019, the Company sold its investment in Biosyn to The Heritage Group, a related party, for total proceeds of $5.0 million and recorded a gain of $1.2 million, which is recorded in Gain on sale of unconsolidated affiliates in the consolidated statements of operations. Prior to the sale, the Company recorded a gain of $3.8 million for the year ended December 31, 2019, which was recorded in the Gain (loss) from unconsolidated affiliates on the consolidated statements of operations.

The Company considers its ownership in Fluid Holding Corp. (“FHC”) a non-marketable equity security without a readily determinable fair value. The Company records this investment using a measurement alternative which measures the security at cost minus impairment, if any, plus or minus changes resulting from qualifying observable price changes with a same or similar security from the same issuer. The FHC investment, net of impairment, is recorded in investments in unconsolidated affiliates in the consolidated balance sheets.

Prior to being sold in the second quarter of 2018, the Company accounted for its ownership in its Pacific New Investment Limited (“PACNIL”) joint venture as an equity method investment in accordance with ASC 323, Investments — Equity Method and Joint Ventures and recorded the investment in investments in unconsolidated affiliates in the consolidated balance sheets. The equity method of accounting is applied when the investor has an ownership interest of less than 50% and/or has significant influence over the operating or financial decisions of the investee. Under the equity method, the Company’s proportionate share of net income (loss) is reflected as a single-line item in the consolidated statements of operations and as increases or decreases, as applicable, in the carrying value of the Company’s investment in the consolidated balance sheets. In addition, the proportionate share of net income (loss) is reflected as a non-cash activity in operating activities in the consolidated statements of cash flows. Contributions increase the carrying value of the investment and are reflected as an investing activity in the consolidated statements of cash flows.

Investments in unconsolidated affiliates are assessed for other-than-temporary impairment whenever changes in the facts and circumstances indicate an other-than-temporary loss in value has occurred. During the year ended December 31, 2019, the Company recorded a $25.4 million impairment charge in loss on impairment and disposal of assets in the consolidated statements of operations. During the years ended December 31, 2018 and 2017, the Company did not report an impairment charge due to unconsolidated affiliates in loss on impairment and disposal of assets in the consolidated statements of operations. For further information on the Company’s investment in unconsolidated affiliates, please read Note 6 - “Investment in Unconsolidated Affiliates.”

Goodwill

Goodwill represents the excess of purchase price over fair value of the net assets acquired in various acquisitions. Please read Note 7 - “Goodwill and Other Intangible Assets” for more information. The Company reviews goodwill for impairment annually on October 1 and whenever events or changes in circumstances indicate its carrying value may not be recoverable in accordance with ASC 350, Intangibles — Goodwill and Other (Topic 350) and ASU 2017-04, Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. Under ASC 350, an entity has the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after assessing the totality of events or circumstances, an entity determines it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then performing the impairment test is unnecessary.

In assessing the qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount, 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 judgment and assumptions. The judgment and assumptions include the identification of macroeconomic conditions, industry and market considerations, cost factors, overall financial performance and Company specific events and making the assessment on whether each relevant factor will impact the impairment test positively or negatively and the magnitude of any such impact.

If the Company’s qualitative assessment concludes that it is probable that an impairment exists or the Company skips the qualitative assessment, then the Company needs to perform a quantitative assessment. In the first step of the quantitative assessment, the Company’s assets and liabilities, including existing goodwill and other intangible assets, are assigned to the identified reporting units to determine the carrying value of the reporting units. Under ASU 2017-04, goodwill impairment testing is done by comparing the fair value of the reporting unit to its carrying value. If the carrying amount exceeds the fair value, the Company would recognize an impairment charge for the amount that the reporting unit's carrying value exceeds the fair value, not to exceed the total amount of goodwill allocated to that reporting unit.

When performing the quantitative assessment, the fair value of the reporting units is determined using the income approach. The income approach focuses on the income-producing capability of the reporting unit, measuring the current value of the reporting unit by calculating the present value of its future economic benefits such as cash earnings, cost savings, corporate tax structure and product offerings. Value indications are developed by discounting expected cash flows to their present value at a rate of return that incorporates the risk-free rate for the use of funds, the expected rate of inflation, and risks associated with the reporting unit. For more information, please read Note 7 - “Goodwill and Other Intangible Assets.”

Definite-Lived Intangible Assets

Definite-lived intangible assets consist of intangible assets associated with customer relationships, tradenames, trade secrets, patents and royalty agreements that were acquired in various acquisitions. The majority of these assets are being amortized using undiscounted estimated future cash flows over the term of the related agreements. Intangible assets associated with customer relationships are being amortized using the undiscounted estimated future cash flows method based upon assumed rates of annual customer attrition. For more information, please read Note 7 - “Goodwill and Other Intangible Assets.”

Other Noncurrent Assets

Other noncurrent assets include turnaround costs. Turnaround costs represent capitalized costs associated with the Company’s periodic major maintenance and repairs and were $31.7 million and $31.4 million as of December 31, 2019 and 2018, respectively. The Company capitalizes these costs and amortizes the costs on a straight-line basis over the lives of the turnaround assets which is generally two to five years. These amounts are net of accumulated amortization of $51.9 million and $64.9 million at December 31, 2019 and 2018, respectively.

Other Current Liabilities

Other current liabilities consisted of the following (in millions):



	December 31,
	2019		2018
RINs Obligation	$	13.0	$	15.8
Transition Services Agreement Payable	19.8		—
Net working capital adjustment liabilities	6.9		—
Other	18.9		18.0
Total other current liabilities	$	58.6	$	33.8

The Company’s Renewable Identification Numbers (“RINs”) obligation (“RINs Obligation”) represents a liability for the purchase of RINs in order to satisfy the U.S. Environmental Protection Agency’s (“EPA”) requirement to blend biofuels into the fuel products it produces pursuant to the EPA’s Renewable Fuel Standard (“RFS”). RINs are assigned to biofuels produced in the U.S. as required by the EPA. The EPA sets annual quotas for the percentage of biofuels that must be blended into transportation fuels consumed in the U.S. and, as a producer of motor fuels from petroleum, the Company is required to blend biofuels into the fuel products it produces at a rate that will meet the Company’s prorated share of the EPA’s annual quota. To the extent the Company is unable to blend biofuels at that rate, it must purchase RINs in the open market to satisfy the annual requirement. The Company’s RINs Obligation is based on the amount of RINs it must purchase and the price of those RINs as of the balance sheet date.

The Company uses the inventory model to account for RINs, measuring acquired RINs at weighted-average cost. The liability is calculated by multiplying the RINs shortage (based on actual results) by the period end RINs spot price. In the event the Company has RINs in excess of the RINs obligation, an asset is recognized on the balance sheet during that reporting period. The asset is initially recorded at cost at the time the Company acquires them and are subsequently revalued at the lower of cost or market as of the last day of each reporting period and the resulting adjustments are reflected in costs of sales for the period in the consolidated statements of operations. The value of RINs in excess of the RINs Obligation, if any, would be reflected in other current assets on the consolidated balance sheets. RINs acquired in excess of the Company’s current RINs Obligation may be sold or held to offset future RINs Obligations. RINs sold are charged to cost of sales with cash inflows recorded in the operating cash flow section of the consolidated statements of cash flows. RINs acquired in a given year may be used for compliance purposes only in the year received or in the following year (current year RINs assets can be used to offset no more than 20% of the subsequent year’s obligation), after which time they expire and can no longer be used for compliance purposes. The liabilities associated with our RINs Obligation are considered recurring fair value measurements. Please read Note 8 for further information on the Company’s RINs Obligation.

The Company entered into a Transaction Service Agreement (“TSA”) as a result of the San Antonio Transaction (read Note 5 - “Divestitures”). Under the terms of the agreement, the Company continued to support many functions of the San Antonio facility including but not limited to purchasing, information technology, accounts receivable and accounts payable support. Under the TSA, the Company continued to collect from customers and pay vendors. The Company would net settle the cash activity with the buyer on a regular basis. At December 31, 2019, the Company owed the buyer $19.8 million as a result of supporting cash activity for the buyer.

Impairment of Long-Lived Assets

The Company periodically evaluates the carrying value of long-lived assets to be held and used, including definite-lived intangible assets, when events or circumstances warrant such a review. The carrying value of a long-lived asset to be held and used is considered impaired when the anticipated separately identifiable undiscounted cash flows from such an asset are less than the carrying value of the asset. In such an event, a write-down of the asset would be recorded through a charge to operations, based on the amount by which the carrying value exceeds the fair value of the long-lived asset. Fair value is determined primarily using anticipated cash flows assumed by a market participant discounted at a rate commensurate with the risk involved. Long-lived assets to be disposed of other than by sale are considered held and used until disposal.

During the years ended December 31, 2019 and 2018, the Company did not identify any impairment indicators that suggested the carrying values of its long-lived assets are not recoverable at the asset groups within the specialty products, fuel products and corporate segments. As a result of the long-lived asset impairment assessment performed, no impairment charges were recorded for the years ended December 31, 2019 and 2018.

During the fourth quarter of 2017, the Company identified impairment indicators that suggested the carrying values long-lived assets including property, plant and equipment at the San Antonio and Missouri asset groups within the fuel products and specialty products segments, respectively, may not be recoverable. The primary impairment indicators included recently completed projections of future cash flows and the associated impact on the long-range strategic plan forecasts, lower than expected cash flows attributed to these asset groups and poor local market conditions. Undiscounted cash flow tests performed for these asset groups indicated that the long-lived assets were not recoverable. The fair value of the asset groups was established using a discounted cash flow method which utilized Level 3 inputs in the fair value hierarchy. The principal parameters used to establish fair values included estimates of future margins on products produced and sold, future commodity prices, future capital expenditures and discount rates. As a result of the long-lived asset impairment assessment performed, the Company recorded impairment charges primarily on property, plant and equipment on its San Antonio asset group of $147.0 million and on its Missouri asset group of $59.2 million for the year ended December 31, 2017.

Revenue Recognition

The Company recognizes revenue in accordance with ASC 606, Revenue Recognition, which states that revenue is recognized when control of the promised goods are transferred to the customer, in an amount that reflects the consideration to which the Company expects to be entitled in exchange for those goods. Please read Note 3 - “Revenue Recognition” for additional information on our revenue recognition accounting policies and elections.

Revenues associated with transactions commonly called buy/sell contracts, in which the purchase and sale of inventory with the same counterparty are entered into “in contemplation” of one another, are combined and reported as a net purchase in cost of sales.

Concentrations of Credit Risk

The Company performs periodic credit evaluations of its customers’ financial condition and in some instances requires cash in advance or letters of credit prior to shipment for domestic orders. For international orders, letters of credit are generally required, and the Company maintains insurance policies which cover certain export orders. The Company maintains an allowance for doubtful customer accounts for estimated losses resulting from the inability of its customers to make required payments. The allowance for doubtful accounts is developed based on several factors including historical experience, the age of the accounts receivable balances, credit quality of the Company’s customers, current economic conditions, expected future trends and other factors that may affect customers’ ability to pay, which exist as of the balance sheet dates. If the financial condition of the Company’s customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. The Company has derivative positions with a limited number of counterparties. The evaluation of these counterparties is performed quarterly in connection with the Company’s ASC 820-10, Fair Value Measurements and Disclosures, valuations to determine the impact of the counterparty credit risk on the valuation of its derivative instruments.

Income Taxes

The Company, as a partnership, is generally not liable for federal and state income taxes on the earnings of Calumet Specialty Products Partners, L.P. and its wholly-owned subsidiaries. However, the Company conducts certain activities through wholly-owned subsidiaries that are corporations, which in certain circumstances are subject to federal, state and local income taxes. Additionally, the Company is subject to franchise taxes in certain states. Income taxes on the earnings of the Company, with the exception of the above-mentioned taxes, are the responsibility of its partners, with earnings of the Company included in partners’ earnings.

In the event that the Company’s taxable income does not meet certain qualification requirements, the Company would be taxed as a corporation. Interest and penalties related to income taxes, if any, would be recorded in income tax expense. Generally, tax returns remain subject to examination by taxing authorities for three years.

The Company accounts for income taxes for its corporations under the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rate is recognized in earnings in the period that includes the enactment date. Valuation allowances are established when necessary to reduce deferred tax assets to the amounts more likely than not to be realized.

The determination of the provision for income taxes requires significant judgment, use of estimates, and the interpretation and application of complex tax laws. Significant judgment is required in assessing the timing and amounts of deductible and taxable items and the probability of sustaining uncertain tax positions. The benefits of uncertain tax positions are recorded in the Company’s financial statements only after determining a more-likely-than-not probability that the uncertain tax positions will withstand challenge, if any, from taxing authorities. When facts and circumstances change, the Company reassesses these probabilities and records any changes through the provision for income taxes.

Earnings per Unit

The Company calculates earnings per unit under ASC 260-10, Earnings per Share. The Company treats incentive distribution rights (“IDRs”) as participating securities for the purposes of computing earnings per unit in the period that the general partner becomes contractually obligated to receive IDRs. Also, the undistributed earnings are allocated to the partnership interests based on the allocation of earnings to the Company’s partners’ capital accounts as specified in the Company’s partnership agreement. When distributions exceed earnings, net income is reduced by the actual distributions with the resulting net loss being allocated to capital accounts as specified in the Company’s partnership agreement.

Unit-Based Compensation

For unit-based compensation equity awards granted, compensation expense is recognized in the Company’s consolidated financial statements on a straight-line basis over the awards’ vesting periods based on their fair values on the dates of grant. The unit-based compensation awards vest over a period not exceeding four years. The amount of compensation expense recognized at any date is at least equal to the portion of the grant date value of the award that is vested at that date. For more information, please read Note 13 - “Partners’ Capital.”

Unit-based compensation liability awards are awards that are currently expected to be settled in cash on their vesting dates, rather than in equity units (“Liability Awards”). Liability Awards are recorded in accrued salaries, wages and benefits based on the vested portion of the fair value of the awards on the balance sheet date. The fair value of Liability Awards is updated at each balance sheet date and changes in the fair value of the vested portions of the Liability Awards are recorded as increases or decreases to compensation expense. The Company recognizes forfeitures as they occur. Please read Note 14 - “Unit-Based Compensation” for more information on Liability Awards.

Shipping and Handling Costs

The Company complies with ASC 606, Revenue Recognition. ASC 606 requires the classification of shipping and handling costs billed to customers in sales and the classification of shipping and handling costs incurred in cost of sales, or to be disclosed if classified elsewhere. The Company has reflected $122.9 million, $137.2 million and $137.1 million, respectively, for the years ended December 31, 2019, 2018 and 2017, in transportation expense in the consolidated statements of operations, the majority of which is billed to customers.

Advertising Expenses

The Company expenses advertising costs as incurred which totaled $4.1 million, $4.3 million and $6.6 million in 2019, 2018 and 2017, respectively. Advertising expenses are reported as selling expenses in the consolidated statements of operations.

Foreign Currency Translation and Transactions

Certain of the Company’s subsidiaries use a local currency as their functional currency. Assets and liabilities of subsidiaries with a local currency as their functional currency are translated at period-end rates of exchange, and revenues and expenses are translated at average exchange rates prevailing for each month. The resulting translation adjustments are made directly to a separate component of other comprehensive income (loss), which is reflected in partners’ capital in the Company’s consolidated balance sheets.

Certain of the Company’s subsidiaries also enter into transactions and have monetary assets and liabilities that are denominated in a currency other than such entity’s respective functional currency. Gains and losses from the revaluation of foreign currency transactions and monetary assets and liabilities are included in other income (expense) in the consolidated statements of operations.

Recently Adopted Accounting Pronouncements

On January 1, 2019, the Company adopted ASU No. 2016-02, Leases (Topic 842) (“ASU 2016-02”) and all the related amendments to its lease contracts using the modified retrospective method. The effective date was used as the Company’s date of initial application with no restatement of prior periods. As such, prior periods continue to be reported under the accounting standards in effect for those periods. Please read Note 22 - “Leases” for further information.

On January 1, 2019, the Company adopted ASU No. 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities, which improves the financial reporting of hedging relationships to better align risk management activities in financial statements and make certain targeted improvements to simplify the application of the hedge accounting guidance in current GAAP. Given the Company’s current risk management strategy of not designating any of its derivative positions as hedges, the adoption of this guidance had no effect on our consolidated financial statements. If, in the future, the Company decides to modify its hedging strategies, this new accounting guidance would become applicable and will be applied at that time.

On January 1, 2019, the Company adopted ASU No. 2018-07, Compensation — Stock Compensation (Topic 718): Improvements to Non-employee Share-Based Payment Accounting (“ASU 2018-07”). This update simplifies the guidance related to non-employee share-based payments by superseding ASC 505-50 and expanding the scope of ASC 718 to include all share-based payment arrangements related to the acquisition of goods and services from both non-employees and employees. Prior to the issuance of this standard update, non-employee share-based payments were subject to ASC 505-50 requirements while employee share-based payments were subject to ASC 718 requirements. ASU 2018-07 is effective for fiscal years (including interim periods) beginning after December 15, 2018, with early adoption permitted. The adoption of ASU 2018-07 had no impact on the Company’s consolidated financial statements.

Recently Issued Accounting Pronouncements

In June 2016, the FASB issued ASU No 2016-13, Credit Losses-Measurement of Credit Losses on Financial Instruments, new guidance for the accounting for credit losses on certain financial instruments. This guidance introduces a new approach to estimating credit losses on certain types of financial instruments and modifies the impairment model for available-for-sale debt securities. This guidance becomes effective January 1, 2020 and is not expected to have a material impact on the Company’s consolidated financial statements.