Basis of Presentation and Significant Accounting Policies (Policies)

9 Months Ended

Jun. 30, 2018

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, the assumptions underlying the condensed consolidated financial statements for these interim periods are reasonable, and all adjustments considered necessary for a fair presentation have been made and are of a normal recurring nature unless otherwise disclosed herein. The results for the interim periods are not necessarily indicative of results to be expected for the entire year. Certain prior period amounts have been reclassified to conform to the current presentation.

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 year, 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 for 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 $17 million and $60 million for the three and nine months ended June 30, 2017, respectively.

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. While the Company is nearing the completion of its assessment of the accounting required under the new revenue recognition guidance and completing documentation of its conclusions, the Company’s revenue is primarily generated from the sale and service delivery of engine and automotive products to customers, which is not accounted for under industry-specific guidance and generally consists of a single delivery element whereby revenue is recognized at the point in time when ownership, risks and rewards transfer. Accordingly, Valvoline believes that most revenue transactions recorded under the new guidance will be substantially consistent with the treatment under existing guidance, and the impact of adoption is not expected to be material to net earnings on an ongoing basis.

Management will finalize its assessment and will adopt the new guidance in the first fiscal quarter of 2019. Valvoline plans to adopt this guidance using the modified retrospective method, which will recognize the cumulative effect of the changes in retained earnings at October 1, 2018, but will not retrospectively apply the new guidance to prior periods. The Company expects to adjust retained deficit at adoption primarily related to the timing of certain sales made to distributors and currently does not expect this adjustment will be material to the Condensed Consolidated Balance Sheet. In addition, the Company expects immaterial impacts to reclassify certain activities in the Condensed Consolidated Statements of Comprehensive Earnings on an ongoing basis following adoption. The specific impacts of adoption of the new guidance will be dependent on facts and circumstances at adoption and could vary from management’s preliminary estimates.

The Company anticipates expanded footnote disclosures under the new revenue guidance, including disaggregation of revenue, pro forma impacts of changes to the financial statements in the initial year of adoption, and qualitative disclosures related to the nature and terms of its sales, timing of the transfer of control and judgments used in the application of the five-step model. The Company is also in the process of identifying and implementing appropriate changes to business processes to support recognition and disclosure under the new guidance.

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. This new guidance is effective for the Company in the first quarter of fiscal 2020 using a modified retrospective approach. The Company has begun planning its assessment and implementation process, including identifying all forms of its outstanding leases globally, as well as analyzing the practical expedients and determining the specific impacts on its condensed consolidated financial statements. While the Company’s evaluation of this guidance is in the early stages, adoption is expected to have a material impact on the Condensed Consolidated Balance Sheet as the majority of the Company’s operating leases are expected to be recorded by establishing right of use assets and associated lease liabilities. The Company also anticipates expanded footnote disclosures related to its leases under the new guidance.

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.