Note 2—Summary of Significant Accounting Policies

Basis of Presentation

The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”). The financial information set forth herein reflects: (a) the consolidated results of operations and cash flows of the Successor for the fiscal year ended June 30, 2016 and 2015, the period from August 15, 2013 through June 30, 2014 and the Predecessor for the period from July 1, 2013 through August 14, 2013, and (b) the financial position of the Successor as of June 30, 2016 and 2015.

Principles of Consolidation

The consolidated financial statements include the accounts of Multi Packaging Solutions International Limited and its controlled subsidiaries (collectively, referred to as the “Company”). All material intercompany accounts and transactions have been eliminated in consolidation.

Use of Estimates

The preparation of the consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates.

Foreign Currency

The functional currencies of the Company’s foreign subsidiaries are the respective local currencies. Assets and liabilities of the Company’s foreign subsidiaries and affiliates are translated into U.S. dollars at the period-end exchange rates, and revenues and expenses are translated at average monthly exchange rates. Translation gains and losses are recorded as a component of accumulated other comprehensive income (loss) within the accompanying consolidated statements of shareholders’ equity. Transaction gains and losses resulting from transactions entered into under contracts in a currency other than the subsidiary’s functional currency are accounted for on a transactional basis as a credit or charge to operations. The Company recognized foreign currency transaction gains (losses) in the amounts of $(5,182), $12,171, $777 and $364 for the fiscal years ended June 30, 2016 and 2015, the period from August 15, 2013 through June 30, 2014 and the period from July 1, 2013 through August 14, 2013, respectively, which is recorded in other (expense) income, net in the accompanying consolidated statements of operations and comprehensive income (loss).

Cash and Cash Equivalents

The Company considers all short-term investments with a maturity of three months or less when purchased to be cash equivalents. The Company had restricted cash deposited in an escrow account relating to contingent consideration from the June 9, 2011 acquisition of CD Cartondruck AG (“Cartondruck”). The escrow balance was released to the selling shareholders of Cartondruck on June 13, 2016 (see Note 4). The balance of the restricted cash as of June 30, 2015 was $1,985, and is included in other assets in the consolidated balance sheet.

Accounts Receivable and Allowance for Doubtful Accounts

Accounts receivable are presented net of an allowance for doubtful accounts of $2,491 and $2,932 as of June 30, 2016 and 2015, respectively. The allowance for doubtful accounts reduces receivables to amounts that are expected to be collected. In estimating the allowance, management considers factors such as current overall and industry-specific economic conditions, statutory requirements, historical and anticipated customer performance, historical experience with write-offs and the level of past-due amounts. Changes in these conditions may result in additional allowances. After all attempts to collect a receivable have failed, the receivable is written off against the allowance.

Inventories

Inventories are stated at the lower of cost or market value. Inventory costs include materials, labor and manufacturing overhead. Cost is determined by the first-in, first-out method. Obsolete inventory is identified based on an analysis of inventory for known obsolescence issues and a write-down or write-off is provided based on this analysis.

Property, Plant and Equipment

Property, plant and equipment is carried at cost and depreciated or amortized on a straight-line basis over the estimated useful lives or lease life, whichever is shorter. Expenditures for maintenance and repairs are charged to current operations, while major improvements that materially extend useful lives are capitalized. Depreciation is computed over the estimated useful lives of the assets using the straight-line method as follows:


Buildings and improvements	3-40 years
Machinery and equipment	3-13 years
Furniture and fixtures	3-7 years

Depreciation expense was $73,683, $78,035, $41,831 and $2,824 for the fiscal years ended June 30, 2016 and 2015, the period from August 15, 2013 through June 30, 2014 and the period from July 1, 2013 through August 14, 2013, respectively.

Deferred Financing Costs

Costs relating to obtaining debt financing are amortized over the term of the related debt using effective interest method. Amortization of deferred financing costs charged to interest expense was $776, $871, $478 and $279 for the fiscal years ended June 30, 2016 and 2015, the period from August 15, 2013 through June 30, 2014 and the period from July 1, 2013 through August 14, 2013, respectively. See also Newly Adopted Accounting Pronouncements section below for a change in accounting principle related to deferred financing costs.

Goodwill and Intangible Assets

Goodwill represents the cost of acquired businesses in excess of the fair value of the assets acquired and liabilities assumed of such businesses at the acquisition date. Goodwill is not amortized, but instead tested for impairment at least annually at the reporting unit level. The Company performs its test for impairment at the beginning of the fourth quarter of its fiscal year, and earlier if an event occurs or circumstances change that indicates impairment might exist. The Company has the option to first assess 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. Otherwise, a two-step impairment test is performed. The impairment test for goodwill requires the Company to compare the fair value of a reporting unit to its carrying value, including goodwill. The Company uses a blended analysis of a discounted cash flow model and market valuation approach to determine the fair values of its reporting units. If the carrying value of a reporting unit exceeds its fair value, the Company would then compare the carrying value of the goodwill to its implied fair value in order to determine the amount of the impairment, if any.

The Company did not recognize any impairment charges for goodwill during any of the periods presented, as the Company’s annual impairment testing indicated that the estimated fair value of each reporting unit exceeded the respective carrying values.

Intangible assets have been acquired through various business acquisitions and include customer relationships, developed technology, licensing agreements, and a photo library. The intangible assets are initially valued at their acquisition date typically using either an excess earnings or relief from royalty method. The relief from royalty method is used for developed technology and licensing agreements and assumes that if the acquired company did not own the intangible asset or intellectual property, it would be willing to pay a royalty for its use. The benefit of ownership of the intellectual property is valued as the relief from the royalty expense that would otherwise be incurred. Customer relationship intangibles are amortized on an accelerated basis in a manner that approximates the estimated future cash flows. Other intangible assets are amortized on a straight-line basis which approximates the associated estimated future cash flows. Useful lives vary by asset type and are determined based on the period over which the intangible asset is expected to contribute directly or indirectly to the Company’s future cash flows.

Impairment of Long-Lived Assets

The Company reviews its definite-lived long-lived assets for impairment whenever events or changes in circumstances indicate that carrying amount of the asset may not be recoverable. Such circumstances could include, but are not limited to (1) a significant decrease in the market value of an asset, (2) a significant adverse change in the extent or manner in which an asset is used, or (3) an accumulation of costs significantly in excess of the amount originally expected for the acquisition of an asset. The Company measures the carrying amount of the asset against the estimated undiscounted future cash flows associated with it. Should the carrying value of the asset being evaluated exceed the estimated undiscounted future cash flows, an impairment loss could be present, at which point recognition of the impairment, if any, would occur based on a determination of the asset’s fair value as compared to its carrying value. During the fiscal year ended June 30, 2016, the Company recorded impairment charges totaling $2,026 related to land, buildings and machinery and equipment at our Stuttgart, Germany facility. As an indicator of impairment resulting from the planned closure of this facility by the end of fiscal 2017, the respective assets were adjusted to their estimated fair values using a market valuation approach. No other impairment charges on long-lived assets were recorded for any of the other periods presented.

Investments in Unconsolidated Entities

Investments in unconsolidated entities over which the Company has significant influence are accounted for under the equity method of accounting, whereby the investment is carried at the cost of the acquisition, plus the Company’s equity in the undistributed earnings or losses. Investments in entities over which the Company does not have the ability to exert significant influence over the investees’ operating and financing activities are accounted for under the cost method of accounting. If there is objective evidence that indicates an equity or cost method investment is impaired, a loss is recognized. For the period from August 15, 2013 through June 30, 2014, the Company recorded an impairment loss of $1,006 related to an equity method investment (see Note 9). No such impairment was recorded for the fiscal years ended June 30, 2016 or 2015.

Available-For-Sale Securities

The Company determines the appropriate classification of its investments in debt and equity securities at the time of purchase and reevaluates such determinations at each balance sheet date. Securities not classified as held to maturity or as trading, are classified as available for sale, and are carried at fair market value, with the unrealized gains and losses, net of tax, included in the determination of comprehensive income (loss). The Company reviews its holdings on a regular basis to determine if there has been an other-than-temporary decline in market value. If it is determined that an other-than-temporary decline exists in a marketable equity security, the Company writes down the investment to its fair market value and records the related write-down as an investment loss in its consolidated statement of operations and comprehensive income (loss). Available-for-sale securities were $261 and $253 as of June 30, 2016 and 2015, respectively, and are recorded in other assets in the consolidated balance sheets. No other-than-temporary decline was recorded within the periods presented.

Derivative Instruments

The Company uses derivative instruments to manage its exposure to certain risks relating to its ongoing business operations. The Company has not elected hedge accounting for certain of these derivative instruments, and accordingly are valued at fair value with unrealized gains or losses reported in earnings during the period of the change. No derivative instruments are entered into for speculative purposes.

One risk managed by the Company using derivative instruments in which the Company did not elect hedge accounting is interest rate risk. To manage interest rate exposure, the Company enters into hedge transactions (interest rate swaps) using derivative financial instruments. The objective of entering into interest rate swaps is to eliminate the variability of cash flows in the London Interbank Offered Rate (“LIBOR”) interest payments associated with variable-rate loans over the life of the loans. As changes in interest rates affect the future cash flow of interest payments, the hedges provide a synthetic offset to interest rate movements. For the fiscal years ended June 30, 2016 and 2015 and the period from August 15, 2013 through June 30, 2014, the change in the fair value of interest rate swaps was $(1,147), $(2,307) and $391, respectively, which is recorded in other (expense) income, net in the accompanying statements of operations and comprehensive income (loss).

The Company is also exposed to foreign-currency exchange-rate fluctuations in the normal course of business, primarily related to the Great Britain Pound Sterling, Euros and the Polish Zloty denominated liabilities within its international subsidiaries whose functional currency is other than the U.S. dollar. The Company manages these fluctuations, in part, using non-deliverable forward foreign exchange contracts and foreign currency forward contracts, that are intended to offset changes in cash flow attributable to currency exchange movements. These contracts are intended primarily to economically address exposure related to merchandise inventory expenditures made by the Company’s international subsidiaries whose functional currency is other than the U.S. dollar. The volume and amounts of foreign currency derivative instruments entered into by the Company are not significant.

Net Investment Hedge

In January 2016, the Company designated the Euro Term Loan (see Note 13) as a net investment hedge of investments in international subsidiaries that use the Euro as their functional currency. For this non-derivative financial instrument designated as a net investment hedge, the change in balance due to the remeasurement of the effective portion for each reporting period is recorded in accumulated other comprehensive income (loss) in the consolidated balance sheets. The spot method is used to measure the effectiveness at the beginning of each reporting period. There was no ineffectiveness for the net investment hedge during fiscal 2016.

Fair Value Measurements

The fair value of a financial instrument is the amount that would be received in an asset sale or paid to transfer a liability in an orderly transaction between unaffiliated market participants. Assets and liabilities measured at fair value are categorized based on whether the inputs are observable in the market and the degree that the inputs are observable. The categorization of financial instruments within the valuation hierarchy is based on the lowest level of input that is significant to the fair value measurement. The hierarchy is prioritized into three levels with the highest priority given to Level 1, as these are the most transparent or reliable. The following fair value hierarchy is used in selecting inputs, with the highest priority given to Level 1, as these are the most transparent or reliable:

Level 1 – unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.

Level 2 – quoted prices in markets that are not active, or inputs which are observable, either directly or indirectly, for substantially the full term of the asset or liability.

Level 3 – prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported by little or no market activity).

The Company calculates the fair value of financial instruments and includes this additional information in the notes to the consolidated financial statements where the fair value is different from the book value of those financial instruments. When the fair value approximates book value, no additional disclosure is made.

Concentrations

Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash and cash equivalents and accounts receivable.

The Company places its cash and cash equivalents with high quality financial institutions and limits the amount of credit exposure with any one institution. At times, the Company’s cash may be uninsured or in deposit accounts that exceed the Federal Deposit Insurance Corporation insurance limits or comparable insurance in Europe.

Concentrations of credit risk with respect to accounts receivable are limited because a large number of geographically diverse customers make up the Company’s customer base, thus spreading the credit risk. The Company controls credit risk through credit approvals, credit limits, and monitoring procedures. The Company performs credit evaluations of its customers, but generally does not require collateral to support accounts receivable. At June 30, 2016 and June 30, 2015, no customers accounted for more than 10% of accounts receivable. For the fiscal years ended June 30, 2016 and 2015 and the period from August 15, 2013 through June 30, 2014, no customers accounted for more than 10% of net sales. For the period from July 1, 2013 through August 14, 2013, one customer accounted for approximately 11% of net sales.

Revenue Recognition

The Company produces packaging products, principally cartons, labels, inserts and rigid packaging for sale to manufacturers of branded and private label consumer goods, pharmaceutical, medical and multi-media products. Products are printed on board, paper or plastic substrates and converted via printing presses and oftentimes subsequently finished in a folding or gluing or other operation. The Company records revenue on the sales of products manufactured when title to the product transfers, which is generally at the time of shipment to the customer.

In all of the above cases, revenue is recorded only when (i) persuasive evidence of an arrangement exists, (ii) delivery has occurred, (iii) the fee is fixed and determinable and (iv) collectability of the sales is reasonably assured. Provisions for discounts and rebates to customers, estimated returns and allowances and other adjustments are provided for in the same period the related sales are recorded when they are determined to be probable and estimable.

Shipping and Handling Fees and Expenses

The Company records shipping and handling related fees charged to customers in net sales and records the related expenses in costs of goods sold in the consolidated statements of operations and comprehensive income (loss).

Advertising Costs

Advertising costs are expensed as incurred. Advertising costs for the fiscal years ended June 30, 2016 and 2015, the period from August 15, 2013 through June 30, 2014 and the period from July 1, 2013 through August 14, 2013 were $853, $828, $585 and $28, respectively. Advertising costs are included in selling, general and administrative expenses in the accompanying consolidated statements of operations and comprehensive income (loss).

Equity-Based Compensation

The Company and its affiliates sponsored various equity compensation plans. The cost of employee services received in exchange for equity-based compensation is measured at the grant date fair value of the equity issued. The cost is recognized as compensation expense over the requisite service period, which is generally as the equity instruments vest. Refer to Note 18 for further discussion of the Company’s equity compensation plans and the amounts recorded in the consolidated financial statements for the periods presented.

Income Taxes

The Company recognizes income taxes in accordance with guidance established by GAAP, which requires an asset and liability approach for financial accounting and reporting for income taxes and establishes a minimum threshold for financial statement recognition of the benefit of tax positions. The provision for income taxes is based upon income or loss after adjustment for those items that are not considered in the determination of taxable income.

Deferred income taxes represent the tax effects of differences between the financial reporting and tax bases of the Company’s assets and liabilities at the enacted tax rates in effect for the years in which the differences are expected to reverse. The Company evaluates the recoverability of deferred tax assets and establishes a valuation allowance when it is more likely than not that some portion or all of the deferred tax assets will not be realized.

Newly Adopted Accounting Pronouncements

In November 2015, the FASB issued ASU No. 2015-17, Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes. ASU No. 2015-17 requires that deferred tax assets and liabilities be classified as noncurrent on the balance sheet. ASU 2015-17 is effective for annual reporting periods beginning after December 15, 2016, and interim periods within those annual periods, with early adoption permitted as of the beginning of an interim or annual reporting period. The Company elected to adopt this new guidance, on a retrospective basis, in the fourth quarter of fiscal 2016. The adoption of this guidance impacted the balance sheet classification of such assets and liabilities. As a result of this retrospective application, total current deferred income tax assets as of June 30, 2015 of $8,454 have now been reclassified, which resulted in an increase to noncurrent deferred income tax assets of $1,883 and a decrease of $6,571 to noncurrent deferred income tax liabilities. The adoption did not otherwise impact the consolidated financial statements.

In September 2015, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2015-16, Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments. ASU No. 2015-16 requires that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. ASU No. 2015-16 is effective for annual reporting periods beginning after December 15, 2015 and for interim periods within such annual period. Early application is permitted for financial statements that have not been previously issued. The Company elected to early adopt the provisions of ASU No. 2015-16 at the end of the third quarter in fiscal 2016 (March 31, 2016). The adoption of the new guidance did not materially impact the Company’s consolidated financial position or results of operations.

In April 2015, the FASB issued ASU No. 2015-03, Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs. The amendments in ASU No. 2015-03 require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability. The recognition and measurement guidance for debt issuance costs are not affected by the amendments. ASU No. 2015-03 must be applied retrospectively and is effective for annual reporting periods beginning after December 15, 2015 and for interim periods within such annual period. Early application is permitted for financial statements that have not been previously issued. In August 2015, the FASB issued ASU No. 2015-15, Interest - Imputation of Interest (Subtopic 835-30): Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements. ASU No. 2015-15 states that for debt issuance costs related to line-of-credit arrangements, the SEC staff would not object to an entity deferring and presenting such costs as an asset and subsequently amortizing the deferred debt issuance costs ratably over the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings on the line-of-credit arrangement. The Company elected to early adopt the provisions of ASU Nos. 2015-03 and 2015-15 on a retrospective bases in the fourth quarter of fiscal 2016. The adoption of the new guidance resulted in the reclassification of $4,311 in deferred financing costs at June 30, 2015 from other long-term assets to long-term debt. The adoption did not otherwise impact the consolidated financial statements.

Recently Issued Accounting Pronouncements

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which requires measurement and recognition of expected credit losses for financial assets held. The amendments in this update are effective for annual periods beginning after December 15, 2019, and interim periods within such annual period. Early adoption is permitted for fiscal years beginning after December 15, 2018, including interim periods within such year. The Company is currently evaluating the potential impacts of adopting the provisions of ASU No. 2016-13.

In March 2016, the FASB issued ASU No. 2016-09, Compensation-Stock Compensation (Topic 718). ASU No. 2016-09 requires all income tax effects of awards to be recognized in the income statement when the awards vest or are settled. It also will allow an employer to repurchase more of an employee’s shares than it can today for tax withholding purposes without triggering liability accounting and to make a policy election to account for forfeitures as they occur. The amendments in this update are effective for annual periods beginning after December 15, 2016, and interim periods within such annual period. Early adoption is permitted, however all of guidance must be adopted in the same period under the transition requirements. The Company is currently evaluating the potential effects of adopting the provisions of ASU No. 2016-02.

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). ASU No. 2016-02 requires an entity to recognize lease assets and lease liabilities on the balance sheet and to disclose key information about the entity’s leasing arrangements. Lease expenses will be recognized in the income statement in a manner similar to existing requirements. The amendments in this update are effective for annual periods beginning after December 15, 2018, and interim periods within such annual period, and must be adopted using a modified retrospective method for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. Early adoption is permitted. The Company is currently evaluating the potential effects of adopting the provisions of ASU No. 2016-02.

In July 2015, the FASB issued ASU No. 2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory. ASU No. 2015-11 requires inventory measured using any method other than last-in, first out or the retail inventory method to be subsequently measured at the lower of cost or net realizable value, rather than at the lower of cost or market. ASU No. 2015-11 is effective for annual reporting periods beginning after December 15, 2016 and for interim periods within such annual period. Early application is permitted. The Company is currently evaluating the potential effects of adopting the provisions of ASU No. 2015-11.

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606). ASU No. 2014-09 supersedes the revenue recognition requirements in Topic 605, Revenue Recognition, and most industry-specific guidance throughout the Industry Topics of the Codification. Additionally, ASU No. 2014-09 supersedes some cost guidance included in Subtopic 605-35, Revenue Recognition-Construction-Type and Production-Type Contracts. Under ASU No. 2014-09, an entity should recognize revenue when it transfers 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. ASU No. 2014-09 also requires additional disclosure about the nature, amount, timing, and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. Additionally, in May 2016, the FASB issued ASU 2016-12, Revenue from contracts with customers (Topic 606): Narrow-scope improvements and practical expedients, which contains certain provision and practical expedients in response to identified implementation issues. The guidance is effective for annual reporting periods beginning after December 15, 2017 and for interim periods within such annual period, with early application prohibited for annual reporting periods beginning after December 15, 2016. Either full retrospective or modified retrospective adoption is permitted. The Company is evaluating the transition method that will be elected and the potential effects of adopting the provisions of ASU No. 2014-09.