As filed with the Securities and Exchange Commission as of August 3, 2018

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10‑Q

(Mark One)
☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2018
Or
☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to

Commission File No. 1‑34062

ILG, Inc.

(Exact name of registrant as specified in its charter)

Delaware (State or other jurisdiction of incorporation or organization)	26‑2590997 (I.R.S. Employer Identification No.)
6262 Sunset Drive, Miami, FL (Address of Registrant’s principal executive offices)	33143 (Zip Code)

(305) 666‑1861

(Registrant’s telephone number, including area code)

(Former name or former address, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S‑T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non‑accelerated filer, a smaller reporting company or an emerging growth company. See definition of “accelerated filer,” “large accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b‑2 of the Exchange Act. (Check one):

Large accelerated filer ☒ Accelerated filer ☐  Non‑accelerated filer ☐
(Do not check if a
smaller reporting company)

Smaller reporting company ☐ Emerging growth company ☐

If an emerging growth company, indicate by checkmark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to section 13(a) of the Exchange Act. Yes ☐ No ☒

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b‑2 of the Exchange Act). Yes ☐ No ☒

As of August 1, 2018, 124,415,714 shares of the registrant’s common stock were outstanding.

TABLE OF CONTENTS

		Page
PART I
Item 1.	Financial Statements	3
	Condensed Consolidated Statements of Income	3
	Condensed Consolidated Statements of Comprehensive Income	4
	Condensed Consolidated Balance Sheets	5
	Condensed Consolidated Statement of Equity	6
	Condensed Consolidated Statements of Cash Flows	7
	Notes to Condensed Consolidated Financial Statements	8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	50
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	82
Item 4.	Controls and Procedures	84
PART II
Item 1.	Legal Proceedings	84
Item 1A.	Risk Factors	84
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	86
Item 3-5.	Not applicable	86
Item 6.	Exhibits	86
Signatures		88

PART I—FINANCIAL STATEMENTS

Item 1. Consolidated Financial Statements

ILG, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(In millions, except share and per share data)

(Unaudited)

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2018		2017		2018		2017
Revenues:
Service and membership related	$	148	$	119	$	300	$	247
Sales of vacation ownership products, net		121		118		244		223
Rental and ancillary services		104		97		222		204
Consumer financing		23		22		47		43
Cost reimbursements		65		85		131		168
Total revenues		461		441		944		885
Operating costs and expenses:
Cost of service and membership related sales		67		33		132		68
Cost of vacation ownership product sales		22		28		61		54
Cost of sales of rental and ancillary services		70		78		142		155
Cost of consumer financing		7		7		15		14
Cost reimbursements		65		85		131		168
Royalty fee expense		11		11		22		21
Selling and marketing expense		81		76		159		145
General and administrative expense		65		58		124		112
Amortization expense of intangibles		5		5		10		10
Depreciation expense		16		15		31		30
Total operating costs and expenses		409		396		827		777
Operating income		52		45		117		108
Other income (expense):
Interest income		1		—		1		—
Interest expense		(7)		(7)		(15)		(12)
Gain on bargain purchase		—		2		—		2
Other income (expense), net		(5)		(2)		—		8
Equity in earnings from unconsolidated entities		—		1		1		3
Total other income (expense), net		(11)		(6)		(13)		1
Earnings before income taxes and noncontrolling interests		41		39		104		109
Income tax provision		(13)		(13)		(33)		(38)
Net income		28		26		71		71
Net income attributable to noncontrolling interests		(1)		—		(2)		(1)
Net income attributable to common stockholders	$	27	$	26	$	69	$	70
Earnings per share attributable to common stockholders:
Basic	$	0.21	$	0.21	$	0.56	$	0.56
Diluted	$	0.21	$	0.20	$	0.55	$	0.55
Weighted average number of shares of common stock outstanding (in 000's):
Basic		124,241		124,384		124,033		124,191
Diluted		125,874		126,141		125,813		125,862
Dividends declared per share of common stock	$	0.175	$	0.15	$	0.35	$	0.30

The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these statements.

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ILG, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In millions)

(Unaudited)

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2018		2017		2018		2017
Net income	$	28	$	26	$	71	$	71
Other comprehensive income, net of tax:
Foreign currency translation adjustments, net of tax		(12)		9		(4)		15
Total comprehensive income, net of tax		16		35		67		86
Less: Net income attributable to noncontrolling interests		(1)		—		(2)		(1)
Less: Other comprehensive income attributable to noncontrolling interests		2		(1)		1		(2)
Total comprehensive income attributable to noncontrolling interests		1		(1)		(1)		(3)
Comprehensive income attributable to common stockholders	$	17	$	34	$	66	$	83

The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these statements.

4

ILG, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In millions, except share and per share data)

	(Unaudited)
	June 30,		December 31,
	2018		2017
ASSETS
Cash and cash equivalents	$	143	$	122
Restricted cash and cash equivalents (including $17and $19 in variable interest entities, "VIEs," respectively)		215		227
Accounts receivable, net of allowance for doubtful accounts of $13 for both periods		115		121
Vacation ownership mortgages receivable, net of allowance of$5 and $4, respectively (including a net $56 and $61 in VIEs, respectively)		77		79
Vacation ownership inventory		486		496
Prepaid income taxes		36		58
Prepaid expenses		91		64
Other current assets (including$3and $4 of interest receivables in VIEs, respectively)		30		33
Total current assets		1,193		1,200
Restricted cash and cash equivalents (including $1 in variable interest entities, "VIEs" for both periods)		4		3
Vacation ownership mortgages receivable, net of allowance of $69 and $51, respectively (including a net$423and $498 in VIEs, respectively)		657		658
Vacation ownership inventory		72		60
Investments in unconsolidated entities		54		55
Property and equipment, net		606		616
Goodwill		564		564
Intangible assets, net		428		440
Other non-current assets		83		91
TOTAL ASSETS	$	3,661	$	3,687
LIABILITIES AND EQUITY
LIABILITIES:
Accounts payable, trade	$	46	$	46
Current portion of securitized debt from VIEs		128		146
Deferred revenue		177		162
Accrued compensation and benefits		64		72
Accrued expenses and other current liabilities (including anet $1 of interest payables in VIEs for both periods)		256		215
Total current liabilities		671		641
Long-term debt		548		562
Securitized debt from VIEs		361		429
Income taxes payable, non-current		2		11
Other long-term liabilities		118		118
Deferred revenue		82		76
Deferred income taxes		142		133
Total liabilities		1,924		1,970
Redeemable noncontrolling interest		1		1
Commitments and contingencies
EQUITY:
Preferred stock—authorized 25,000,000 shares, of which 100,000 shares are designated Series A Junior Participating Preferred Stock; $0.01 par value; none issued and outstanding		—		—
Common stock—authorized 300,000,000 shares; $0.01 par value; issued 134,403,465 and 134,053,132 shares, respectively		1		1
Treasury stock— 9,987,627 shares at cost each period		(164)		(164)
Additional paid-in capital		1,281		1,278
Retained earnings		615		597
Accumulated other comprehensive loss		(36)		(33)
Total ILG stockholders’ equity		1,697		1,679
Noncontrolling interests		39		37
Total equity		1,736		1,716
TOTAL LIABILITIES AND EQUITY	$	3,661	$	3,687

The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these statements.

5

ILG, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF EQUITY

(In millions, except share data)

(Unaudited)

																	Accumulated
					Total ILG								Additional				Other
	Total		Noncontrolling		Stockholders’		Common Stock			Treasury Stock			Paid-in		Retained		Comprehensive
	Equity		Interests		Equity		Amount		Shares	Amount		Shares	Capital		Earnings		Loss
Balance as of December 31, 2017	$	1,716	$	37	$	1,679	$	1	134,053,132	$	(164)	9,987,627	$	1,278	$	597	$	(33)
Net income		71		2		69		—	—		—	—		—		69		—
Cumulative adjustment related to change in accounting principle		(7)		—		(7)		—	—		—	—		—		(7)		—
Other comprehensive income, net of tax		(4)		(1)		(3)		—	—		—	—		—		—		(3)
Non-cash compensation expense		11		—		11		—	—		—	—		11		—		—
Issuance of restricted stock for converted shares in connection with the Vistana acquisition		—		—		—		—	(163,976)		—	—		—		—		—
Issuance of common stock upon vesting of RSUs, net of withholding taxes		(9)		—		(9)		—	513,574		—	—		(9)		—		—
Dividends declared on common stock		(43)		—		(43)		—	735		—	—		1		(44)		—
Other		1		1		—		—	—		—	—		—		—		—
Balance as of June 30, 2018	$	1,736	$	39	$	1,697	$	1	134,403,465	$	(164)	9,987,627	$	1,281	$	615	$	(36)

The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these statements.

6

ILG, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In millions)

(Unaudited)

	Six Months Ended June 30,
	2018		2017
Cash flows from operating activities:
Net income	$	71	$	71
Adjustments to reconcile net income to net cash and restricted cash provided by operating activities:
Amortization expense of intangibles		10		10
Amortization of debt issuance costs		2		2
Depreciation expense		31		30
Bad debt expense		4		1
Allowance for losses on originated loans		23		15
Allowance for impairment on acquired loans		3		5
Accretion of mortgages receivable		2		3
Non-cash compensation expense		11		12
Deferred income taxes		10		13
Equity in earnings from unconsolidated entities		(1)		(3)
Distributions from investments in unconsolidated entities		2		—
Gain on bargain purchase of Vistana acquisition		—		(2)
Changes in operating assets and liabilities:
Accounts receivable		(41)		4
Vacation ownership mortgages receivable (originations)		(171)		(163)
Vacation ownership mortgages receivable (collections)		139		140
Vacation ownership inventory (additions)		(39)		(120)
Vacation ownership inventory (disposals)		53		49
Vacation ownership operating related insurance proceeds		19		—
Vacation ownership consolidated HOAs related insurance proceeds		23		—
Prepaid expenses and other current assets		(26)		(20)
Prepaid income taxes and income taxes payable		11		9
Accounts payable and other current liabilities		27		(1)
Deferred income		21		36
Other, net		—		(9)
Net cash and restricted cash provided by operating activities		184		82
Cash flows from investing activities:
Capital expenditures		(22)		(48)
Purchases of trading investments		4		—
Net cash used in investing activities		(18)		(48)
Cash flows from financing activities:
Borrowings (payments) on revolving credit facility, net		(15)		71
Payments on securitized debt		(86)		(66)
Purchases of treasury stock		—		(3)
Dividend payments to stockholders		(43)		(37)
Withholding taxes on vesting of restricted stock units and restricted stock		(9)		(5)
Net cash and restricted cash used in financing activities		(153)		(40)
Effect of exchange rate changes on cash, cash equivalents and restricted cash		(3)		3
Net increase (decrease) in cash, cash equivalents and restricted cash		10		(3)
Cash, cash equivalents and restricted cash at beginning of period		352		244
Cash, cash equivalents and restricted cash at end of period	$	362	$	241
Supplemental disclosures of cash flow information:
Interest paid, net of amounts capitalized	$	21	$	17
Income taxes paid, net of refunds	$	12	$	16

The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these statements.

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ILG, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2018

(Unaudited)

NOTE 1—ORGANIZATION AND BASIS OF PRESENTATION

Organization

ILG, Inc. is a leading provider of professionally delivered vacation experiences and the exclusive global licensee for the Hyatt®, Sheraton®  and Westin® brands in vacation ownership. We operate in the following two segments: Vacation Ownership (VO) and Exchange and Rental.

Our VO segment engages in sales, marketing, financing and development of vacation ownership interests (VOIs); the management of vacation ownership resorts; and related services to owners and associations. The VO operating segment consists of the VOI sales and financing business of Vistana Signature Experiences (Vistana) and Hyatt Vacation Ownership (HVO) as well as the management related lines of business of Vistana, HVO, Vacation Resorts International (VRI), Trading Places International (TPI), VRI Europe and certain homeowners’ associations (HOAs) under our control.

Our Exchange and Rental segment offers access to vacation accommodations and other travel-related transactions and services to members of our programs and other leisure travelers, by providing vacation exchange services and vacation rentals, working with resort developers, HOAs and operating vacation rental properties. The Exchange and Rental operating segment consists of Interval International (referred to as Interval), the Vistana Signature Network, the Hyatt Residence Club, the TPI exchange business, and Aqua-Aston Holdings, Inc. (Aqua-Aston).

ILG was incorporated as a Delaware corporation in May 2008 under the name Interval Leisure Group, Inc. and commenced trading on The NASDAQ Stock Market in August 2008 under the symbol "IILG" and now trades under “ILG.”

On May 11, 2016, we acquired the vacation ownership business of Starwood Hotels & Resorts Worldwide, LLC (Starwood), now known as Vistana. In connection with the acquisition, Vistana entered into an exclusive, 80 - year global license agreement with Starwood for the use of the Sheraton and Westin brands in vacation ownership. The global license agreement may also be extended for two 30 – year terms, subject to meeting certain sales performance tests. Also, Vistana has the non-exclusive license for the existing St. Regis® and The Luxury Collection® vacation ownership properties and an affiliation with the Starwood Preferred Guest program.

On April 30, 2018, we entered into an Agreement and Plan of Merger (“Merger Agreement”), with Marriott Vacations Worldwide Corporation (“Marriott Vacations”), Ignite Holdco, Inc. and Ignite Holdco Subsidiary, Inc. (two of our wholly owned subsidiaries), and Volt Merger Sub, Inc. and Volt Merger Sub, LLC (two wholly owned subsidiaries of Marriott Vacations), pursuant to which Marriott Vacations will acquire ILG in a series of transactions (the “Combination Transactions”) and ILG stockholders will receive $14.75 in cash (without interest) and 0.165 shares of common stock of Marriott Vacations for each share of ILG common stock held by such stockholder.  This will result in ILG stockholders owning approximately 43% of Marriott Vacations following the merger transactions. See Note 23 for further discussion.

8

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and with the rules and regulations of the Securities and Exchange Commission. Accordingly, these financial statements do not include all of the information and notes required by GAAP for complete financial statements. In the opinion of ILG’s management, all adjustments (including normal recurring accruals) considered necessary for a fair presentation have been included. Interim results are not indicative of the results that may be expected for a full year.

Individual amounts presented by quarter in our interim financial statements may not add to the year-to-date amount due to rounding and, in the case of per share amounts, differences in the average common shares outstanding during each period.

Additionally, the prior period condensed consolidated financial statements presented in this report have been restated as part of our adoption of ASC 606. See Note 3 for additional information.

Principles of Consolidation

The accompanying condensed consolidated financial statements include the accounts of ILG, our wholly‑owned subsidiaries, and companies in which we have a controlling interest, including variable interest entities (“VIEs”) where we are the primary beneficiary in accordance with consolidation guidance. All significant intercompany balances and transactions have been eliminated in these condensed consolidated financial statements. References in these financial statements to net income attributable to common stockholders and ILG stockholders’ equity do not include noncontrolling interests, which represent the outside ownership of our consolidated non‑wholly owned entities and are reported separately.

The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in our 2017 Annual Report on Form 10‑K.

Seasonality

Revenue at ILG is influenced by the seasonal nature of travel. Within our VO segment, our sales and financing business experiences a modest impact from seasonality, with higher sales volumes during the traditional vacation periods. Our vacation ownership management businesses by and large do not experience significant seasonality, with the exception of our resort operations revenue which tends to be higher in the first quarter.

Within our Exchange and Rental segment, we recognize exchange and Getaway revenue based on confirmation of the vacation, with the first quarter generally experiencing higher revenue and the fourth quarter generally experiencing lower revenue. Remaining rental revenue is recognized based on occupancy. For the vacation rental business, the first and third quarters generally generate higher revenue as a result of increased leisure travel to our Hawaii‑based managed properties during these periods, and the second and fourth quarters generally generate lower revenue.

NOTE 2—SIGNIFICANT ACCOUNTING POLICIES

Our significant accounting policies were described in Note 2 accompanying our audited consolidated financial statements included in our 2017 Annual Report on Form 10-K. There have been no significant changes in our significant accounting policies for the six months ended June 30, 2018 other than changes related to the adoption of ASU 2014‑09, “Revenue from Contracts with Customers (Topic 606) (“ASU 2014‑09”). See Note 3 for further details and related disclosures.

9

Accounting Estimates

ILG’s management is required to make certain estimates and assumptions during the preparation of its consolidated financial statements in accordance with GAAP. These estimates and assumptions impact the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities as of the date of the consolidated financial statements. They also impact the reported amount of net earnings during any period. Actual results could differ from those estimates.

Significant estimates underlying the accompanying condensed consolidated financial statements include:

· the recovery of long‑lived assets as well as goodwill and other intangible assets;

· purchase price allocations of business combinations;

· allowance for loan losses for vacation ownership mortgages receivable;

· accounting for acquired vacation ownership mortgages receivable;

· cost of vacation ownership product sales related estimates included in our relative sales value calculation, such as future projected sales revenue and expected project costs to complete;

· the accounting for income taxes including deferred income taxes and related valuation allowances;

· the determination of deferred membership revenue and deferred membership costs; and

· the determination of stock‑based compensation.

In the opinion of ILG’s management, the assumptions underlying the condensed consolidated financial statements of ILG and its subsidiaries are reasonable.

Earnings per Share

Basic earnings per share attributable to common stockholders is computed by dividing the net income attributable to common stockholders by the weighted average number of shares of common stock outstanding for the period. Treasury stock is excluded from the weighted average number of shares of common stock outstanding. Diluted earnings per share attributable to common stockholders is computed based on the weighted average number of shares of common stock and dilutive securities outstanding during the period. Dilutive securities are common stock equivalents that are freely exercisable into common stock at less than market prices or otherwise dilute earnings if converted. The net effect of common stock equivalents is based on the incremental common stock that would be issued upon the assumed exercise of common stock options and the vesting of RSUs and restricted stock using the treasury stock method. Common stock equivalents are not included in diluted earnings per share when their inclusion is antidilutive. The computations of diluted earnings per share available to common stockholders exclude 0.1 million RSUs and restricted shares for each of the three months ended June 30, 2018 and 2017 and 0.3 million and 0.4 million RSUs and restricted shares for the six months ended June 30, 2018 and 2017, respectively, as the effect of their inclusion would have been antidilutive to earnings per share.

The computation of weighted average common and common equivalent shares used in the calculation of basic and diluted earnings per share is as follows (in thousands):

	Three Months Ended		Six Months Ended
	June 30,		June 30,
	2018	2017	2018	2017
Basic weighted average shares of common stock outstanding	124,241	124,384	124,033	124,191
Net effect of common stock equivalents assumed to be vested related to RSUs and restricted stock	1,633	1,757	1,780	1,671
Diluted weighted average shares of common stock outstanding	125,874	126,141	125,813	125,862

10

Earnings per share for the three and six months ended June 30, 2018 and 2017 are as follows (in thousands, except per share data):

		Three Months Ended				Six Months Ended
		June 30,				Six Months Ended June 30,
		2018		2017		2018		2017
Net income attributable to common stockholders	$	26,574	$	25,840	$	69,483	$	69,832
Weighted average number of shares of common stock outstanding:
Basic		124,241		124,384		124,033		124,191
Diluted		125,874		126,141		125,813		125,862
Earnings per share attributable to common stockholders:
Basic	$	0.21	$	0.21	$	0.56	$	0.56
Diluted	$	0.21	$	0.20	$	0.55	$	0.55

Recent Accounting Pronouncements: General

With the exception of those discussed below, there are no recent accounting pronouncements or changes in accounting pronouncements since the recent accounting pronouncements described in our 2017 Annual Report on Form 10-K that are of significance, or potential significance, to ILG based on our current operations. The following summary of recent accounting pronouncements is not intended to be an exhaustive description of the respective pronouncement, and may include certain accounting standards also disclosed in our 2017 Annual Report on Form 10-K which have not yet been adopted.

In July 2018, the FASB issued ASU 2018-09, “Codification Improvements” (“ASU 2018-09”). The amendments in this update affect a wide variety of topics in the codification. To list a few, there are amendments to “Compensation – Stock Compensation – Income Taxes (Subtopic 718-740)”, “Business Combinations – Income Taxes (Subtopic 805-740)”, “Fair Value Measurement – Overall (Subtopic 820-10)”, etc. The transition and effective date guidance is based on the facts and circumstances of each amendment. Some of the amendments in this ASU do not require transition guidance and will be effective upon issuance of this update. However, many of the amendments in this ASU do have transition guidance with effective dates for annual periods beginning after December 15, 2018. We are currently evaluating the methods and impact of adopting this new standard on our consolidated financial statements.

In June 2018, the FASB issued ASU 2018-07, “Compensation – Stock Compensation (Topic 718)” (“ASU 2018-07”) to align the measurement and classification guidance for share-based payments to nonemployees with the guidance for share-based payments to employees, with certain exceptions. Under the guidance, the measurement of equity-classified nonemployee awards will be fixed at the grant date, which may lower their cost and reduce volatility in the income statement. The amendments in this ASU are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. We do not anticipate the adoption of this guidance will have a material impact on our consolidated financial statements.

In February 2016, the FASB issued ASU 2016 02, “Leases (Topic 842)” (“ASU 2016 02”). ASU 2016 02 amends the existing accounting standards for lease accounting, including requiring lessees to recognize most leases on their balance sheets and making targeted changes to lessor accounting. The new guidance will be effective for public entities for annual periods beginning after December 15, 2018 and interim periods therein. Originally, entities were required to adopt ASU 2016-02 using a modified retrospective transition approach for all leases existing at, or entered into after, the date of initial application. However, in July 2018, the FASB issued ASU 2018-11, “Leases (Topic 842): Targeted Improvements” (“ASU 2018-11”), which now allows entities the option of recognizing the cumulative effect of applying the new standard as an adjustment to the opening balance of retained earnings in the year of adoption while continuing to present all periods under previous lease accounting guidance. In July 2018, the FASB also issued ASU 2018-10, “Codification Improvements to Topic 842, Leases” (“ASU 2018-10”), which clarifies how to apply certain aspects of ASU 2016-02. We expect to adopt ASU 2016-02, ASU 2018-10 and ASU 2018-11 commencing in fiscal year 2019 and are currently in the process of evaluating and analyzing our leases pursuant to this guidance. While we have

11

not yet finalized a quantified impact of adopting this new standard, we do expect our balance sheet presentation to be impacted due to the recognition of right-of-use assets and lease liabilities for operating leases.

Adopted Accounting Pronouncements: General

In March 2018, the FASB issued ASU 2018-05, “Income Taxes (Topic 740): Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118”. The guidance amends SEC paragraphs in Accounting Standards Codification (ASC or Codification) 740, Income Taxes, to reflect SEC Staff Accounting Bulletin (SAB) 118, which provides guidance for companies that are not able to complete their accounting for the income tax effects of the Tax Cuts and Jobs Act (the “Tax Reform Act”) in the period of enactment. For further discussion please see Note 19. This ASU was effective immediately and the adoption of this guidance did not have a material impact on our consolidated financial statements.

In May 2017, the FASB issued ASU 2017-09, “Compensation—Stock Compensation (Topic 718): Scope of Modification Accounting” to clarify when to account for a change to the terms or conditions of a share-based payment award as a modification. Under this new guidance, modification accounting is required only if the fair value, the vesting conditions, or the classification of the award (as equity or liability) changes as a result of the change in terms or conditions. The guidance is effective prospectively for annual periods beginning on or after December 15, 2017. The adoption of this guidance did not have a material impact on our consolidated financial statements.

In February 2017, the FASB issued ASU 2017-05, “Other Income – Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20): Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets”. The FASB issued this ASU to clarify the scope of subtopic 610-20, which was issued in May 2014 as part of Accounting Standards Update (ASU) No. 2014-09, “Revenue from Contracts with Customers (Topic 606).” The effective date and transition requirements of these amendments are the same as the effective date and transition requirements of ASU 2014-09, "Revenue from Contracts with Customers (Topic 606)". We plan to adopt this standard, as well as other clarifications and technical guidance issued by the FASB related to this new revenue standard, on January 1, 2018. The adoption of this guidance did not have a material impact on our consolidated financial statements.

In January 2017, the FASB issued ASU 2017-01, “Business Combinations (Topic 805),” to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses by clarifying the definition of a business. The definition of a business affects many areas of accounting including acquisition, disposals, goodwill and consolidation. This amendment covers Phase 1 of a three phase project. The update is effective for annual periods beginning after December 15, 2017, including interim periods within those periods. The amendments in this update should be applied prospectively on or after the effective date. The adoption of this guidance did not have a material impact on our consolidated financial statements.

In November 2016, the FASB issued ASU 2016-18, “Statement of Cash Flows (Topic 230).” This ASU requires that a statement of cash flows explains the change during the period in the total of 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 update is effective for annual periods beginning after December 15, 2017, including interim periods within those periods.  The adoption of this guidance did not have a material impact on our consolidated financial statements. The effect of the adoption of ASU 2016-18 on our consolidated statements of cash flows was to include restricted cash balances in the beginning and end of period balances of cash and cash equivalents and restricted cash. The change in restricted cash was previously disclosed in operating activities and financing activities in the consolidated statements of cash flows.

In October 2016, the FASB issued ASU 2016-16, “Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory” (“ASU 2016-16”) as part of the Board’s initiative to reduce complexity in accounting standards.  This ASU eliminates an exception in ASC 740, which prohibits the immediate recognition of income tax consequences of intra-entity asset transfers other than inventory.  Under ASU 2016-16, entities will be required to

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recognize the immediate current and deferred income tax effects of intra-entity asset transfers, which often involve a subsidiary of a company transferring intellectual property to another subsidiary.  For public entities, the new guidance is effective for annual periods beginning after December 15, 2017, and interim periods within those annual periods.  This ASU’s amendments should be applied on a modified retrospective basis, recognizing the effects in retained earnings as of the beginning of the year of adoption. In accordance with this ASU, during the first quarter of 2018 we recorded a cumulative adjustment of approximately $7 million to opening retained earnings. The adoption of this guidance did not have a material impact on our consolidated financial statements.

In August 2016, the FASB issued ASU 2016-15, “Statement of Cash Flows (Topic 230).”  This ASU addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows under existing guidance. The update is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. The amendments should be applied using a retrospective transition method to each period presented. The adoption of this guidance did not have a material impact on our consolidated financial statements.

In January 2016, the FASB issued ASU 2016‑01, “Financial Instruments—Overall (Subtopic 825‑10),” which amends the guidance in U.S. GAAP on the classification and measurement of financial instruments. Although the ASU retains many current requirements, it significantly revises an entity’s accounting related to (1) the classification and measurement of investments in equity securities and (2) the presentation of certain fair value changes for financial liabilities measured at fair value. The ASU also amends certain disclosure requirements associated with the fair value of financial instruments. The amendments in this update are effective for fiscal years beginning after December 31, 2017, including interim periods within those fiscal years. The adoption of this guidance did not have a material impact on our consolidated financial statements.

Adopted Accounting Pronouncements: Revenue Recognition

In May 2014, the FASB issued ASU 2014‑09 (otherwise known as ASC 606). The FASB and the International Accounting Standards Board (“IASB”) initiated a joint project to clarify the principles for recognizing revenue and to develop a common revenue standard for U.S. GAAP and IFRS that would: (i) remove inconsistencies and weaknesses in revenue requirements; (ii) provide a more robust framework for addressing revenue issues; (iii) improve comparability of revenue recognition practices across entities, industries, jurisdictions, and capital markets; (iv) provide more useful information to users of financial statements through improved disclosure requirements; and (v) simplify the preparation of financial statements by reducing the number of requirements to which an entity must refer. To meet those objectives, the FASB amended the FASB Accounting Standards Codification (“Codification”) and created a new Topic 606, Revenue from Contracts with Customers. The core principle of the guidance in ASU 2014‑09 is that an entity should recognize revenue to depict the transfer of 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 guidance in this ASU supersedes the revenue recognition requirements in Topic 605, Revenue Recognition, and most industry specific guidance throughout the Industry Topics of the Codification. Additionally, ASU 2014‑09 supersedes some cost guidance included in Subtopic 605‑35, Revenue Recognition—Construction‑Type and Production‑Type Contracts. The ASU is effective for fiscal years beginning after December 15, 2017 (and interim periods within that period).

In periods subsequent to the initial issuance of this ASU, the FASB has issued additional ASU’s clarifying items within Topic 606, as follows:

· In August 2015, the FASB issued ASU 2015-14, "Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date," which defers by one year the effective date of ASU 2014-09, "Revenue from Contracts with Customers (Topic 606)" to annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period.

· In March 2016, the FASB issued ASU 2016-08, “Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations” (“ASU 2016-08”). The amendments in ASU 2016-08 serve to clarify the implementation guidance on principal vs. agent considerations.

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· In April 2016, the FASB issued ASU 2016-10, “Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing” (“ASU 2016-10”). The purpose of ASU 2016-10 is to clarify two aspects of Topic 606: identifying performance obligations and the licensing implementation guidance (while retaining the related principles for those areas).

· In May 2016, the FASB issued ASU 2016-12, “Revenue from Contracts with Customers (Topic 606)” (“ASU 2016-12”). The purpose of ASU 2016-12 is to address certain issues identified to improve Topic 606 by enhancing guidance on assessing collectability, presentation of sales taxes and other similar taxes collected from customers, noncash consideration and completed contracts and contract modifications at transition.

· In December 2016, the FASB issued ASU 2016-20, “Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers,” which amends certain aspects of the Board’s new revenue standard, ASU 2014-09.This ASU addresses thirteen specific issues pertaining to Topic 606, Revenue from Contracts with Customers.

We have adopted this standard, as well as other clarifications and technical guidance issued by the FASB related to this new revenue standard, as of January 1, 2018, using the retrospective adoption method. See Note 3 for further details.

NOTE 3—REVENUE RECOGNITION

The core principle of the guidance in ASC 606 is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services. We recognize all revenue related to contracts with customers in accordance with ASC 606. We elected to apply ASC 606, and all related ASUs, using the retrospective adoption method. Under this method, we revised our consolidated financial statements for the years ended December 31, 2017, 2016 and 2015, and applicable interim periods within those years, as if ASC 606 had been effective for those periods. The major areas of impact in applying ASC 606 include the following:

1. earlier recognition of certain VOI sales where the transaction price was deemed collectable yet we were deferring recognition due to specific buyers’ commitment requirements under legacy GAAP (also known as buyers’ commitment deferral or BCD);

2. gross versus net presentation changes, which did not impact profitability, such as incentives provided to customers on VOI sales (e.g., SPG points), management fees and cost reimbursements attributable to unsold VOI inventory, and administrative fees for VOI sales in certain cases;

3. classification of certain trial vacation package sales which also did not impact profitability;

4. capitalization of certain incremental costs to obtain a contract related to trial vacation package sales;

5. the instances in which we can apply the percentage of completion revenue recognition method when construction of a vacation ownership project is not complete; and

6. classification of certain payments to developers in our exchange business who are functioning as agents in the member acquisition process.

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The tables below summarize the adjustments that were made to our condensed consolidated statement of income for the three and six months ended June 30, 2017 and our condensed consolidated balance sheet as of December 31, 2017, on a line item basis (USD in millions, except per share data):

	(As reported)					(Restated)
	Three Months Ended June 30, 2017	Reclassification Adjustments (1)	BCD	Percentage of Completion Related	Other (2)	Three Months Ended June 30, 2017
Sales of vacation ownership products, net	123	(2)	1	(4)	—	118
Cost reimbursements	89	(4)	—	—	—	85
Total revenues	450	(6)	1	(4)	—	441
Cost of service and membership related sales	32	1	—	—	—	33
Cost of vacation ownership products sales	29	—	—	(1)	—	28
Cost reimbursements	89	(4)	—	—	—	85
Selling and marketing expense	80	(3)	—	—	(1)	76
Total operating costs and expenses	404	(6)	—	(1)	(1)	396
Equity in earnings from unconsolidated entities	2	—	(1)	—	—	1
Earnings before income taxes and noncontrolling interest	41	—	—	(3)	1	39