Basis of Presentation and Significant Accounting Policies (Policies)

3 Months Ended

Dec. 31, 2017

The accompanying unaudited condensed consolidated financial statements have been prepared by Valvoline Inc. (“Valvoline” or the “Company”) in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) and Securities and Exchange Commission (“SEC”) regulations for interim financial reporting, which do not include all information and footnote disclosures normally included in annual financial statements. Therefore, these condensed consolidated financial statements should be read in conjunction with Valvoline’s Annual Report on Form 10-K for the fiscal year ended September 30, 2017.

The preparation of condensed consolidated financial statements in conformity with U.S. GAAP requires management to make use of estimates and assumptions that affect the reported amounts and disclosures. Actual results may vary from these estimates. In the opinion of management, all adjustments considered necessary for a fair presentation have been included herein, and the assumptions underlying the condensed consolidated financial statements for these interim periods are reasonable. The results for the interim periods are not necessarily indicative of results to be expected for the entire year.

Recent accounting pronouncements

A description of new U.S. GAAP accounting standards issued and adopted during the current year is required in interim financial reporting. A detailed listing of recent accounting standards relevant to Valvoline is included in the Annual Report on Form 10-K for the fiscal year ended September 30, 2017. The following standards relevant to Valvoline were either issued or adopted in the current period, or are expected to have a meaningful impact on Valvoline in future periods.

Recently adopted

In the first fiscal quarter of 2018, Valvoline adopted the following:

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In July 2015, the Financial Accounting Standards Board (“FASB”) issued accounting guidance to simplify the subsequent measurement of certain inventories by replacing the current lower of cost or market test with a lower of cost or net realizable value test. The guidance applies only to inventories for which cost is determined by methods other than last-in, first out (“LIFO”) and retail inventory methods. Valvoline adopted this guidance prospectively on October 1, 2017. Valvoline utilizes LIFO to value approximately 70% of its gross inventory and there were no material differences in the Company's previous valuation methodology for its remaining inventory using lower of cost or market to lower of cost or net realizable value.

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In March 2017, the FASB issued accounting guidance that changed how employers who sponsor defined benefit pension and/or postretirement benefit plans present the net periodic benefit cost in the Condensed Consolidated Statements of Comprehensive Income. This guidance requires employers to present the service cost component of net periodic benefit cost in the same caption as other employee compensation costs from services rendered during the period. All other components of the net periodic benefit cost are presented separately outside of the operating income caption. Valvoline retrospectively adopted this guidance on October 1, 2017. Accordingly, Net pension and other postretirement plan non-service income and remeasurement adjustments has been reclassified to non-operating income for all periods presented within the Condensed Consolidated Statements of Comprehensive Income, which reduced previously reported operating income by $26 million for the three months ended December 31, 2016.

Issued but not yet adopted

In May 2014, the FASB issued accounting guidance outlining a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers, which supersedes most current revenue recognition guidance. This guidance introduces a five-step model for revenue recognition that focuses on transfer of control, as opposed to transfer of risk and rewards under current guidance. The Company is evaluating the effect of adopting the new revenue guidance on its financial statements and does not currently expect it to have a material effect to net earnings. Based on an evaluation of current contracts and revenue streams to-date, Valvoline believes that most revenue transactions recorded under the new guidance will be substantially consistent with treatment under existing guidance, with certain reclassifications expected within the Condensed Consolidated Statements of Comprehensive Earnings and certain minimal changes to the timing of the recognition of revenues. The Company's revenue transactions generally consist of a single performance obligation to transfer promised goods and are not accounted for under industry-specific guidance. The Company anticipates expanded footnote disclosures under the new guidance.

Management will continue to complete its assessment of revenue streams and implementation plans, including monitoring developments, and plans to substantially complete the Company's implementation assessment in early 2018 and finalize conclusions by the fourth quarter of fiscal 2018. Valvoline will adopt this standard in the first quarter of fiscal 2019 and will provide updated disclosures of the anticipated impacts of adoption in future filings.

In February 2016, the FASB issued new accounting guidance related to lease transactions. The primary objective of this guidance is to increase transparency and comparability among organizations by requiring lessees to recognize assets and liabilities on the balance sheet for the rights and obligations created by leases and to disclose key information about leasing arrangements. The Company expects to adopt the new guidance in the first quarter of fiscal 2020 using the modified retrospective method. While adoption is expected to lead to a material increase in the assets and liabilities recorded on the Condensed Consolidated Balance Sheet and an increase in footnote disclosures related to leases, the Company is in the process of developing assessment and implementation plans to determine the specific impacts, including those on the Condensed Consolidated Statements of Comprehensive Earnings.

Inventories

INVENTORIES

Certain lubricants are valued at the lower of cost or market using the last-in, first-out (“LIFO”) method. Remaining inventories are carried at the lower of cost or net realizable value using the weighted average cost method.

Earnings Per Share

EPS is reported under the treasury stock method.