Revenue Recognition

The majority of our revenue is derived from short term contracts. We account for revenue in accordance with Topic 606, which we adopted on January 1, 2018, using the modified retrospective method. See “Note 2 – New Accounting Pronouncements” for further discussion of the adoption, including the impact on our 2018 Consolidated Financial Statements.

Revenues are recognized when control of the promised goods or services is transferred to our customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services.

The following tables disaggregate our product and service revenues from contracts with customers by major product line and geographic region for year ended December 31, 2018:



	Year Ended December 31, 2018
(Dollars in millions)	Western Hemisphere		Eastern Hemisphere		Total Excluding Rental Revenues
Product Lines:

Production	$	1,176	$	342	$	1,518
Completions	609		604		1,213
Drilling and Evaluation	612		778		1,390
Well Construction	429		857		1,286
Total	$	2,826	$	2,581	$	5,407



	Year Ended December 31, 2018
(Dollars in millions)	Year Ended December 31, 2018
Geographic Areas:

United States	$	1,435
Latin America	1,017
Canada	374
Western Hemisphere	2,826

Middle East & North Africa	1,376
Europe/Sub-Sahara Africa/Russia	920
Asia	285
Eastern Hemisphere	2,581

Total Product and Service Revenue before Rental Revenues	5,407
Rental Revenues	337
Total Revenues	$	5,744

Contract Balances

The timing of revenue recognition, billings and cash collections results in billed accounts receivable, unbilled receivables, contract assets, and customer advances and deposits (contract liabilities classified as deferred revenues) on the Consolidated Balance Sheets.

Receivables for products and services with customers, under Topic 606, are included in “Accounts Receivable, Net,” contract assets are included in “Other Current Assets” and contract liabilities are included in “Other Current Liabilities” on our Consolidated Balance Sheets.

The following table provides information about receivables for product and services included in “Accounts Receivable, Net”

at December 31, 2018 and January 1, 2018, respectively:

Consideration under certain contracts such as turnkey or lump sum contracts may be classified as contract assets as the invoicing occurs once the performance obligations have been satisfied while the customer simultaneously receives and consumes the benefits provided. We also have receivables for work completed but not billed in which the rights to consideration are conditional and would be classified as contract assets. These are primarily related to service contracts and are not material to our Consolidated Financial Statements. We may also have contract liabilities and defer revenues for certain product sales that are not distinct from their installation.

We did not recognize any revenues during 2018 related to performance obligations satisfied prior to January 1, 2018.

Significant changes in the contract assets and liabilities balances during the period are as follows:



(Dollars in millions)	Contract Assets			Contract Liabilities
Balance at January 1, 2018	$	10		$	42
Revenue recognized that was included in the deferred revenue balance at the beginning of the period	—			(112		)
Increase due to cash received, excluding amount recognized as revenue during the period	—			120
Increase due to revenue recognized during the period but contingent on future performance	14			—
Transferred to receivables from contract assets recognized at the beginning of the period	(13		)	—
Changes as a result of adjustments due to changes in estimates or contract modifications	—			21
Impairment of contract assets	(5		)	—
Reclassification to held for sale and sold	(2		)	(7		)
Balance at December 31, 2018	$	4		$	64

Performance Obligations

A performance obligation is a promise in a contract to transfer a distinct good or service to the customer, and is the unit of account in Topic 606. A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied.

Our principal business is to provide equipment and services to the oil and natural gas exploration and production industry, both on land and offshore, through our major product lines: Production, Completions, Drilling and Evaluation and Well Construction.

Generally, our revenue is recognized for services over time as the services are rendered and we primarily utilize an output method such as time elapsed or footage drilled which coincides with how customers receive the benefit. Both contract drilling and pipeline service revenue is contractual by nature and generally governed by day-rate based contracts. Revenue is recognized on product sales at a point in time when control passes and is generally upon delivery but is dependent on the terms of the contract.

Our services and products are generally sold based upon purchase orders, contracts or call-out work orders that include fixed per unit prices or variable consideration but do not generally include right of return provisions or other significant post-delivery obligations. We generally bill our sales of services and products upon completion of the performance obligation. Product sales are billed and recognized when control passes to the customer. Our products are produced in a standard manufacturing operation, even if produced to our customer’s specifications. Revenues are recognized at the amount to which we have the right to invoice for services performed. Our payment terms vary by the type and location of our customer and the products or services offered. The term between invoicing and when payment is due is not significant. For certain products or services and customer types, we require payment before the products or services are delivered to the customer. We defer revenue recognition on such payments until the products or services are delivered to the customer.

From time to time, we may enter into bill and hold arrangements. When we enter into these arrangements, we determine if the customer has obtained control of the product by determining (a) the reason for the bill-and-hold arrangement; (b) whether the product is identified separately as belonging to the customer; (c) whether the product is ready for physical transfer to the customer; and (d) whether we are unable to utilize the product or direct it to another customer.

We account for individual products and services separately if they are distinct and the product or service is separately identifiable from other items in the contract and if a customer can benefit from it on its own or with other resources that are readily available to the customer. The consideration, including any discounts, is allocated between separate products and services based on their standalone selling prices. The standalone selling prices are determined based on the prices at which we separately sell our products and services. For items not sold separately (e.g. term software licenses in our Production product line), we estimate standalone selling prices using the adjusted market assessment approach.

Up-front payments for preparation and mobilization of equipment and personnel in connection with new drilling contracts are deferred along with any related incremental costs incurred directly related to preparation and mobilization. The deferred revenue and costs are recognized over the contract term using the straight-line method. Costs of relocating equipment without contracts are expensed as incurred. Demobilization fees received are recognized over the contract period and may be constrained to the amount that it is probable a significant reversal in the fees will not occur. When determining if such variable consideration should be constrained, management considers whether there are factors outside the Company’s control that could result in a significant reversal of revenue as well as the likelihood and magnitude of such a potential reversal.

The nature of our contracts gives rise to several types of variable consideration, including claims and lost-in-hole charges. Our claims are not significant and lost-in-hole charges are constrained variable consideration. We do not estimate revenue associated with these types of variable consideration.

We incur rebillable expenses including shipping and handling, third-party inspection and repairs, and customs costs and duties. We recognize the revenue associated with these rebillable expenses when reimbursed by customers as “Product Revenues” and all related costs as “Cost of Products” in the accompanying Consolidated Statements of Operations.

We provide certain assurance warranties on product sales which range from one to five years but do not offer extended warranties on any of our products or services. These assurance warranties are not separate performance obligations, thus no portion of the transaction price is allocated to our obligations under the assurance warranties.

In the following table, estimated revenue expected to be recognized in the future related to performance obligations that are either unsatisfied or partially unsatisfied as of December 31, 2018 primarily relate to subsea services and an artificial lift contract:



(Dollars in millions)	2019		2020		2021		2022		Thereafter		Total
Service revenue	$	57	$	33	$	18	$	18	$	19	$	145

All consideration from contracts with customers is included in the amounts presented above.

Early Production Facility Long-Term Construction Contracts

We account for our long-term early production facility construction contracts in Iraq as our performance obligations under the terms of the contract are satisfied, which generally occurs with the transfer of control of the goods or services to the customer. Our only remaining contract is the Zubair contract, which is in its final warranty stage. There has been no change to our cumulative estimated loss of $532 million from all of the Iraq contracts since December 31, 2016. Our net billings in excess of costs as of December 31, 2018 and December 31, 2017 were $31 million and $56 million, respectively, and are shown in the “Other Current Liabilities” on the accompanying Consolidated Balance Sheets.

Venezuela Revenue Recognition

In the second quarter of 2017, we changed the accounting for revenue with our primary customer in Venezuela to record a discount reflecting the time value of money and accrete the discount as interest income over the expected collection period using the effective interest method. In the fourth quarter of 2017, we changed the accounting for revenue with substantially all of our customers in Venezuela due to the downgrade of the country’s bonds by certain credit agencies, continued significant political and economic turmoil and continued economic sanctions around certain financing transactions imposed by the U.S. government. In connection with this development, we recorded a charge of $230 million to fully reserve our receivables for these customers in Venezuela. We continue to monitor our Venezuelan operations and will actively pursue the collection of our outstanding invoices. During 2018, we collected $16 million on previously fully reserved accounts receivable.

Practical Expedients

We generally expense sales commissions paid when incurred as a result of obtaining a contract because the amortization period is one year or less. These costs are recorded within “Selling, General and Administrative Attributable to Segments” on our Consolidated Statements of Operations.

We do not disclose the value of unsatisfied performance obligations for (i) contracts with an original expected length of one year or less and (ii) contracts for which we recognize revenue at the amount to which we have the right to invoice for services performed.

(Dollars in millions)

December 31, 2018

January 1, 2018

Receivables for Product and Services in Accounts Receivable, Net