2. REVENUE FROM CONTRACTS WITH CUSTOMERS

On May 28, 2018, we adopted ASU 2014-09, Revenue from Contracts with Customers (new revenue standard), using the modified retrospective method. We recognized the cumulative effect of initially applying the new revenue standard as an adjustment to opening retained earnings. The comparative information has not been restated and continues to be reported under the accounting standards in effect for those periods.

We recorded a net increase to opening retained earnings of $13.7 million as of May 28, 2018, due to the cumulative impact of adopting the new revenue standard, with the impact related to our customized products. The impacts of the adoption of the new revenue standard on our consolidated financial statements were as follows (in millions):

Consolidated Statements of Earnings


	Thirteen Weeks Ended August 26, 2018
	As Reported		Balances Without Adoption of ASC 606		Impact of Adoption Increase (Decrease)
Net sales	$	914.9	$	917.4	$	(2.5)
Cost of sales		684.3		685.8		(1.5)
Income from operations		152.6		153.6		(1.0)
Income tax expense		34.3		34.6		(0.3)
Net income attributable to Lamb Weston Holdings, Inc.		107.8		108.5		(0.7)

Consolidated Balance Sheets


	As of August 26, 2018
	As Reported		Balances Without Adoption of ASC 606		Impact of Adoption Increase (Decrease)
Receivables, less allowance for doubtful accounts	$	331.1	$	246.9	$	84.2
Inventories		447.7		515.0		(67.3)
Deferred income taxes		109.9		106.0		3.9
Retained earnings		519.7		506.7		13.0

Consolidated Statements of Cash Flows


	Thirteen Weeks Ended August 26, 2018
	As Reported		Balances Without Adoption of ASC 606		Impact of Adoption Increase (Decrease)
Cash flows from operating activities
Net income	$	111.4	$	112.1	$	(0.7)
Deferred income taxes		13.9		14.1		(0.2)
Receivables		(18.6)		(21.0)		2.4
Inventories		33.2		34.7		(1.5)

Historically, we recognized revenue on a point-in-time basis in all of our segments. The trigger for point-in-time recognition is when the customer takes title to the goods and assumes the risks and rewards for the goods. The adoption of ASC 606 did not have a material impact on our revenue recognition for point-in-time product sales. However, there are certain products that we manufacture to customers’ unique recipes (customized products). Due to costs associated with reworking, transporting, and repackaging these products, we concluded that these products do not have an alternative future use at a reasonable profit margin under ASC 606.

The customized product sales are covered by purchase orders. Once the customized product is manufactured per the purchase order, we have an enforceable right to payment for the products. As such, the adoption of ASC 606 resulted in the acceleration of revenue for customized products at the time we have a legally enforceable right to payment since these products do not have an alternative use at a reasonable profit margin. Sales of customized products are recurring, thereby limiting the net impact of the adoption of ASC 606, and we do not expect it to have a material impact on future results of operations and cash flows.

Segment Information

Our operations are principally in the United States. With respect to operations outside of the United States, no single foreign country or geographic region was significant to consolidated operations in fiscal 2018, 2017, and 2016. While the nature of our contracts can vary based on the business, customer type, and region, in all instances it is our customary business practice to receive a valid order from the customer, in which each parties’ rights and related payment terms are clearly identifiable. The adoption of ASC 606 had the following impact on segment net sales (in millions):


	Thirteen Weeks Ended August 26, 2018
	As Reported		Balances Without Adoption of ASC 606		Impact of Adoption Increase (Decrease)
Net sales:
Global	$	466.8	$	468.5	$	(1.7)
Foodservice		297.8		298.0		(0.2)
Retail		116.2		116.1		0.1
Other		34.1		34.8		(0.7)
Total net sales	$	914.9	$	917.4	$	(2.5)

Performance Obligations and Significant Judgments

Our principal business is to manufacture and sell frozen potato products. We also sell frozen vegetables, commercial ingredients, and appetizers. As a general rule, none of our businesses provide equipment installation or other ancillary services outside producing, packaging, and shipping products to customers.

Our revenue is primarily derived from fixed consideration; however, we do have contract terms that give rise to variable consideration, primarily cash discounts, coupons, and rebates, as well as other sales incentives and trade promotion allowances described in Note 1, Nature of Operations and Summary of Significant Accounting Policies, of the Notes to Combined and Consolidated Financial Statements in "Part II, Item 8. Financial Statements and Supplementary Data" of the Form 10-K. We estimate sales incentives and trade promotions based on historical experience to record reductions in revenue which is consistent with methods outlined in ASC 606.

Contracts or purchase orders with customers could include a single type of product or multiple types or grades of products. Regardless, the contracted price with the customer is agreed to at the individual product level outlined in the customer contracts or purchase orders. We do not bundle prices; however, we do negotiate with customers on pricing and rebates for the same products based on a variety of factors (e.g. level of contractual volume). We’ve concluded that the prices negotiated with each individual customer are representative of the stand-alone selling price of the product.

Generally, we recognize revenue on a point in time basis when the customer takes title to the goods and assumes the risks, rewards, or control of the goods. We recognize revenue over time for customized products as they are produced and we have a purchase order providing legally enforceable right to payment for the goods.

Practical Expedients and Exemptions

As part of our adoption of the new revenue standard, the Company has elected to account for shipping and handling activities as fulfillment activities and recognize the incremental costs of obtaining a contract as an expense when incurred if the amortization period of the asset we would recognize is one year or less. The election of these practical expedients results in accounting treatments consistent with our historical accounting policies and therefore, these elections and expedients do not have a material impact on the comparability of our financial statements.