1. Summary of significant accounting policies

Basis of presentation and consolidation

The accompanying unaudited consolidated financial statements include the accounts of Emergent BioSolutions Inc. ("Emergent" or the "Company") and its wholly owned and majority owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. The unaudited consolidated financial statements included herein have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information and in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X issued by the Securities and Exchange Commission ("SEC"). Certain information and footnote disclosures normally included in consolidated financial statements prepared in accordance with U.S. generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto contained in the Company's Annual Report on Form 10-K for the year ended December 31, 2016, as filed with the SEC.

During the six months ended June 30, 2017, there have been no significant changes to the Company's summary of significant accounting policies contained in the Company's Annual Report on Form 10-K for the year ended December 31, 2016, as filed with the SEC, except for revenue recognition associated with the new Biomedical Advanced Research and Development Authority ("BARDA") contract for BioThrax and the modification of the Company's contract for the NuThrax product candidate with BARDA ("the BARDA NuThrax Contract").

The BARDA NuThrax Contract was entered into on September 30, 2016. This contract is a service arrangement that includes multiple elements. The deliverables under the BARDA NuThrax Contract are the completion of development for NuThrax and the procurement of NuThrax for the Strategic National Stockpile ("SNS"). The Company has determined that the procurement of NuThrax under the BARDA NuThrax Contract is a contingent deliverable, as it is dependent upon successful completion of development; therefore the Company has excluded this from the allocation of the contract consideration. The Company allocated the value of the contract to the development for NuThrax based on best estimate of selling price ("BESP"). BESP methodology for the development deliverable was developed using a cost build-up for internal and external costs, plus a specified mark-up. The Company has allocated $147.5 million to the development services deliverable and will recognize revenue as the services are provided.

On March 16, 2017, the Company entered into a contract with BARDA, valued at $100 million, for the delivery of BioThrax to the Strategic National Stockpile ("SNS") over a two-year period of performance ("the BARDA BioThrax Contract"). In conjunction with the signing of this contract, the Company entered into a modification to its BARDA NuThrax Contract. The modification to the BARDA NuThrax Contract increases the number of doses of NuThrax to be delivered under the base period from two million to three million doses with a commensurate reduction in dose price for the initial deliveries. The modification also provides for a discount on the purchase price for doses to be procured during the option period by up to $100 million. As a result of the modification of the BARDA NuThrax Contract, in conjunction with execution of the BARDA BioThrax Contract, the Company has determined that the two agreements are linked. The Company analyzed these agreements and determined that the units of accounting under the linked agreements are:

·	development services for the NuThrax product candidate under the BARDA NuThrax Contract; and

·	procurement of BioThrax under the BARDA BioThrax Contract.

The Company's allocation of contract consideration for the development services was updated based on the services provided prior to March 17, 2017. The allocation of contract consideration for the BioThrax doses to be sold under the BARDA BioThrax contract was determined based on similar pricing provided to other customers. The Company determined the amount of contract consideration to be allocated to the discounts was based on an undiscounted probability adjusted model based on the expected timing of regulatory approval for NuThrax, expected levels of procurement of NuThrax upon regulatory approval and the market conditions for these types of medical countermeasures. The Company allocated the contract consideration to the two units of accounting as follows:

·	development services for the NuThrax product candidate under the BARDA NuThrax Contract was $137.1 million

·	procurement of BioThrax under the BARDA BioThrax Contract was $93.6 million

The Company will defer a portion of the consideration received for doses delivered under the BARDA BioThrax Contract and the development services for the NuThrax product candidate. The Company will recognize the deferred revenue upon the delivery of NuThrax doses under the BARDA NuThrax Contract, or upon the future extinguishment of the Company's obligation to deliver NuThrax doses to which the discount applies.

The Company has classified the results of operations of Aptevo Therapeutics Inc. ("Aptevo") as discontinued operations for the three and six months ended June 30, 2016. The historical financial statements and footnotes have been revised accordingly. See Note 2. "Discontinued operations" for further details regarding the spin-off. For financial reporting purposes, in the periods following the spin-off, the Company reports financial information as one business segment.

In the opinion of the Company's management, any adjustments contained in the accompanying unaudited consolidated financial statements are of a normal recurring nature and are necessary to present fairly the financial position of the Company as of June 30, 2017. Interim results are not necessarily indicative of results that may be expected for any other interim period or for an entire year.

Recently issued accounting standards

In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2014-09, Revenue from Contracts with Customers (Topic 606) ("ASU No. 2014-09"). ASU No. 2014-09 supersedes the revenue recognition requirements in Topic 605, Revenue Recognition, as well as most industry-specific guidance, and significantly enhances comparability of revenue recognition practices across entities and industries by providing a principles-based, comprehensive framework for addressing revenue recognition issues. In order for a provider of promised goods or services to recognize as revenue the consideration that it expects to receive in exchange for the promised goods or services, the provider should apply the following five steps: (1) identify the contract with a customer(s); (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract; and (5) recognize revenue when (or as) the entity satisfies a performance obligation. ASU No. 2014-09 also specifies the accounting for some costs to obtain or fulfill a contract with a customer and provides enhanced disclosure requirements. The standard will be effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. The Company will adopt this standard effective January 1, 2018 and intends to use the modified retrospective method when adopting ASU No. 2014-09. The Company has completed an initial impact analysis, including reviewing the terms and conditions of its contracts. The Company is in the process of finalizing its accounting policy. Once the accounting policy is finalized, the Company will design and implement necessary changes to processes and controls in order to account for revenue under the new standard beginning on the adoption date. The Company believes that there could be changes to the revenue recognition related to the Company's multiple element contracts, primarily those with the U.S. government. Based on the Company's timeline and planned resources, the Company anticipates completing its implementation by the adoption date.

In March 2016, the FASB issued ASU No. 2016-09, Compensation - Stock Compensation (Topic 718) ("ASU No. 2016-09"). ASU No. 2016-09 simplifies several aspects of the accounting for share-based payment award transactions, including: (1) the income tax consequences, (2) classification of awards as either equity or liabilities, and (3) classification on the statement of cash flows. As of January 1, 2017, the Company adopted and performed the evaluation required by the standard and did not identify any conditions or events that would have a material impact on the current disclosures in the financial statements. The Company has retrospectively adjusted the operating and financing sections within the statement of cash flows for the classification of employee taxes paid associated with equity award activities for the six months ended June 30, 2016. In addition, the Company prospectively adopted the provisions related to the excess tax benefits, and as a result prior periods were not adjusted. If the Company had adopted this provision retrospectively, there would have been no change to the estimated effective annual tax rate for the three and six months ended June 30, 2016, but there would have been a tax benefit associated with stock option activity of $1.2 million and $3.5 million, respectively, recorded in the provision for income taxes on the Company's statement of operations.

In January 2017, the FASB issued ASU No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business ("ASU No. 2017-01"). ASU No. 2017-01 provides clarification for the definition of a business with the objective of adding guidance and providing a more robust framework to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The new standard will be effective for all annual periods beginning after December 15, 2017. Early adoption is permitted. The Company will be assessing the impact of this standard on potential acquisitions in 2017.

In January 2017, the FASB issued ASU No. 2017-04, Intangibles - Goodwill and Other (Topic 250): Simplifying the Test for Goodwill Impairment ("ASU No. 2017-04"). The standard eliminates the second step in the goodwill impairment test, which requires an entity to determine the implied fair value of the reporting unit's goodwill. Instead, an entity should recognize an impairment loss if the carrying value of the net assets assigned to the reporting unit exceeds the fair value of the reporting unit, with the impairment loss not to exceed the amount of goodwill allocated to the reporting unit. The standard is effective for annual and interim goodwill impairment tests conducted in fiscal years beginning after December 15, 2019. Early adoption is permitted. The Company does not believe that the new standard will have a material impact on its financial statements.

There are no other recently issued accounting pronouncements that are expected to have a material impact on the Company's financial position, results of operations or cash flows.