2. NEW ACCOUNTING STANDARDS

Revenue from Contracts with Customers

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (“Topic 606”), which supersedes the previous revenue recognition guidance. The new standard focuses on creating a single source of revenue guidance for revenue arising from contracts with customers for all industries. The core principle of the new standard is for an entity to recognize revenue to depict the transfer of promised goods or services to its customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The new standard also includes a cohesive set of disclosure requirements intended to provide users of financial statements with comprehensive information about the nature, amount, timing and uncertainty of revenue and cash flows arising from a company’s contracts with its customers. Topic 606 permits two methods of adoption: retrospectively to each prior reporting period presented as in the full retrospective method, or retrospectively with the cumulative effect of initially applying the guidance recognized at the date of initial application as in the modified retrospective transition method.

On January 1, 2018, the Company adopted Topic 606 using the modified retrospective transition method. Therefore, the comparative financial information has not been restated and continues to be reported under the accounting standards in effect for those periods. The Company recorded the cumulative effect of initially applying the new revenue recognition standard on January 1, 2018 and recorded an after-tax adjustment of $126 to decrease beginning retained earnings. This cumulative adjustment relates to a change in the timing of revenue recognition of dispensing prescription drugs for home delivery from the date the drugs are shipped under the previous accounting guidance to the date the drugs are physically delivered which better reflects when control transfers to the customer under the new accounting standard. The effect of this change is not significant as there is a very short timeframe from the shipment date to the physical delivery date of the prescription drugs. Additionally, in the PBM segment, revenue related to a portion of customer contracts was previously recognized on a net basis as the Company was considered to be acting as an agent in those transactions under the prior guidance in Topic 605 primarily because it did not have inventory risk or credit risk. As part of the implementation of Topic 606, the Company assessed the principal versus agent guidance in Topic 606 and determined that the Company is the principal in these transactions under the new guidance as it controls the process by which pharmaceutical drugs are dispensed to its customers and, effective January 1, 2018, began to recognize revenue on a gross basis.

As stated, the comparative prior period information for the year ended December 31, 2017 and 2016 has not been adjusted and continues to be reported under the Company’s historical revenue recognition policies.

The details of the significant changes and quantitative impact on the financial statement line items in the consolidated balance sheet as of January 1, 2018 for the adoption of Topic 606 was as follows:


	As Reported,				As Adjusted,
	December 31, 2017		Adjustment		January 1, 2018
Receivables, net	$	332,091	$	(6,483)	$	325,608
Inventories		206,603		6,313		212,916
Total current assets		634,070		(170)		633,900
Total assets		1,940,423		(170)		1,940,253
Accrued expenses — other		20,560		(44)		20,516
Total current liabilities		651,457		(44)		651,413
Total liabilities		1,190,922		(44)		1,190,878
Retained earnings		91,816		(126)		91,690
Total shareholders’ equity		749,501		(126)		749,375
Total liabilities and shareholders’ equity		1,940,423		(170)		1,940,253

The table below summarize the impacts of the application of Topic 606 as compared with the guidance that was in effect before the change on the consolidated balance sheet, statement of operations and comprehensive loss, and statement of cash flows as of and for the year ended December 31, 2018, as follows:


			Adjustments
	As Reported		for Topic 606		As Adjusted
Consolidated Balance Sheet:
Receivables, net	$	326,602	$	15,106	$	341,708
Inventories		210,573		(14,489)		196,084
Total current assets		556,256		617		556,873
Total assets		1,476,359		617		1,476,976
Accrued expenses – other		21,014		160		21,174
Total current liabilities		558,585		160		558,745
Total liabilities		1,011,275		160		1,011,435
Accumulated deficit		(210,579)		457		(210,122)
Total shareholders’ equity		465,084		457		465,541
Total liabilities and shareholders’ equity		1,476,359		617		1,476,976

Consolidated Statement of Operations and Comprehensive Loss:
Net sales	$	5,492,524	$	(358,543)	$	5,133,981
Cost of sales		(5,116,515)		358,990		(4,757,525)
Gross profit		376,009		447		376,456
Loss from operations		(267,285)		447		(266,838)
Loss before income taxes		(307,308)		447		(306,861)
Income tax benefit		5,039		(116)		4,923
Net loss		(302,269)		331		(301,938)
Net loss attributable to Diplomat Pharmacy, Inc.		(302,269)		331		(301,938)
Total comprehensive loss		(306,561)		331		(306,230)

Consolidated Statement of Cash Flows:
Net loss	$	(302,269)	$	331	$	(301,938)
Change in: Accounts receivable		(2,333)		(15,106)		(17,439)
Inventories		(3,932)		14,489		10,557
Other assets and liabilities		5,612		286		5,898

The disclosure requirements of Topic 606 are included within the revenue recognition accounting policy, effective January 1, 2018, in Note 3.

Derivatives and Hedging

In August 2017, the FASB issued ASU No. 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities (“ASU 2017-12”). ASU 2017-12 aligns hedge accounting with risk management activities and simplifies the requirement to qualify for hedge accounting. ASU 2017-12 is effective for annual periods beginning on or after December 15, 2018, including interim periods within those annual periods. Early adoption is permitted.

Effective January 1, 2018, the Company early adopted ASU 2017-12. There was no impact to the Company at the time of adoption.

Accounting Standards Issued Not Yet Adopted

Leases

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) which requires lessees to recognize the following for all leases, except for short-term leases, at the commencement date: (1) a lease liability which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and (2) a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. Lessor accounting is largely unchanged. In July 2018, the FASB issued ASU 2018-10, Codification Improvements to Topic 842, Leases, which provides corrections or clarification on narrow aspects of Topic 842. Also, in July 2018, the FASB issued ASU 2018-11, Leases (Topic 842): Targeted Improvements, which provides entities with another transition method for adopting the new leasing guidance. As originally issued, Topic 842 requires entities to use a modified retrospective transition approach to apply the new guidance as of the beginning of the earliest period presented in the financial statements in the period adopted. The optional transition method allows entities to apply the new guidance at the adoption date and record a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption, and not to restate the comparative periods presented. ASU No. 2016-02 will also require expanded disclosures. ASU No. 2016-02 is effective for annual periods and interim periods within those annual periods beginning after December 15, 2018.

The Company plans to adopt the new lease accounting guidance in the first quarter of 2019 using the optional transition method. The Company elected to apply the package of practical expedients upon transition, which includes no reassessment of whether existing contracts are or contain leases as well as the lease classification for existing leases was retained. The adoption of the standard will result in recognition of net lease right-of-use assets and lease liabilities as of January 1, 2019, primarily related to its real estate operating leases. Also, a cumulative effect adjustment to retained earnings will be recorded which relates to a deferred gain recorded upon a sale-leaseback transaction in 2018 which will be recognized under the new leasing guidance on January 1, 2019. The Company is in the process of quantifying these items. The new guidance will not have a significant impact on the timing or measurement of lease expense.

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which is intended to improve financial reporting by requiring the recording of credit losses on financial assets, including receivables, on a more timely basis. The guidance will replace the current incurred loss accounting model with an expected loss approach. The new methodology requires an entity to estimate the credit losses expected over the life of an exposure based on historical experience, current conditions, and reasonable and supportable forecasts. The guidance requires enhanced disclosures to help investors and other financial statement users better understand significant estimates and judgments used in estimating credit losses. ASU No. 2016-13 is effective for annual periods and interim periods within those annual periods, beginning after December 15, 2019. The effect of adoption of the standard is required as an adjustment to the opening balance of retained earnings as of the beginning of the first reporting period in which ASU No. 2016-13 is effective. The Company has not yet determined the magnitude of any such one-time adjustment or the overall impact of ASU No. 2016-13 on its consolidated financial statements.