Summary of Significant Accounting Policies (Policies)

12 Months Ended

Dec. 31, 2019

Basis of Presentation and Principles of Consolidation

The accompanying consolidated financial statements are presented in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and include the accounts of the Company. All significant intercompany transactions and balances have been eliminated.

Principles of Consolidation

As the sole manager of Switch, Ltd., Switch, Inc. operates and controls all of the business and affairs of Switch, and has the sole voting interest in, and controls the management of, Switch, and has the obligation to absorb the losses of, and receive benefits from, Switch. Accordingly, Switch, Inc. identifies itself as the primary beneficiary of Switch and began consolidating Switch as of the closing date of the IPO, resulting in a noncontrolling interest related to the Common Units held by Members on its consolidated financial statements.

Switch has been determined to be the predecessor for accounting purposes and, accordingly, the consolidated financial statements for periods prior to the IPO and the Transactions have been adjusted to combine the previously separate entities for presentation purposes. Amounts for the period from January 1, 2017 through October 10, 2017 presented in the consolidated financial statements and notes to consolidated financial statements herein represent the historical operations of Switch. The amounts as of December 31, 2019 and 2018, for the years ended December 31, 2019 and 2018, and for the period from October 11, 2017 through December 31, 2017 reflect the consolidated operations of the Company. For the period from June 13, 2017 to October 10, 2017, Switch, Inc. had no business transactions or activities and had no assets or liabilities with the exception of the issuance of one share at par value of $0.001 per share, which was canceled as of the closing date of the IPO.

The Company periodically evaluates entities for consolidation either through ownership of a majority voting interest, or through means other than voting interest, in accordance with the Variable Interest Entity (“VIE”) accounting model. A VIE is an entity in which either (i) the equity investors as a group, if any, lack the power through voting or similar rights to direct the activities of such entity that most significantly impact such entity’s economic performance or (ii) the equity investment at risk is insufficient to finance that entity’s activities without additional subordinated financial support.

Use of Estimates

The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. On an ongoing basis, the Company evaluates its estimates, including, but not limited to, those related to the allowance for doubtful accounts, useful lives of property and equipment, deferred income taxes, liabilities under the TRA, equity-based compensation, deferred revenue, incremental borrowing rate, fair value of performance obligations, and probability assessments of exercising renewal options on leases. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable. Actual results could differ from these estimates.

Cash and Cash Equivalents

The Company considers all highly liquid instruments with an original maturity of three months or less to be cash equivalents. There were no cash equivalents as of December 31, 2019. Cash equivalents as of December 31, 2018 were comprised of money market funds totaling $53.3 million.

Investments

The Company’s investments in entities where it holds at least a 20% ownership interest and has the ability to exercise significant influence over, but not control, the investee are accounted for using the equity method of accounting. The Company’s share of the investee’s results of operations is included in equity in net losses of investments and foreign currency translation adjustment, as applicable, is included in other comprehensive income with a corresponding adjustment to its investment. The Company discontinues applying the equity method of accounting when the investment is reduced to zero. If the investee subsequently reports net income or other comprehensive income, the Company resumes applying the equity method of accounting only after its share of unrecognized net income and other comprehensive income, respectively, equals the share of losses not recognized during the period the equity method of accounting was suspended. The Company gives precedence to other comprehensive income and losses when determining whether to resume applying the equity method of accounting. Investments in entities where the Company holds less than a 20% ownership interest are generally accounted for using the cost method of accounting.

Advertising Costs, Policy [Policy Text Block]

Advertising Costs

Advertising costs are expensed when incurred and are included in selling, general and administrative expense in the accompanying consolidated statements of comprehensive income (loss). Advertising expense was $1.5 million, $1.1 million, and $1.8 million during the years ended December 31, 2019, 2018, and 2017, respectively.

Summary of Significant Accounting Policies

Basis of Presentation and Principles of Consolidation

Use of Estimates

Cash and Cash Equivalents

Investments

Concentration of Credit and Other Risks

Although the Company operates primarily in Nevada, realization of its customer accounts receivable and its future operations and cash flows could be affected by adverse economic conditions, both regionally and elsewhere in the United States. During the years ended December 31, 2019, 2018, and 2017, the Company’s largest customer and its affiliates comprised 13%, 11%, and 11%, respectively, of the Company’s revenue. Two customers, one of which was the Company’s largest customer and its affiliates, accounted for 10% or more of accounts receivable as of December 31, 2019 and the Company’s largest customer and its affiliates accounted for 10% or more of accounts receivable as of December 31, 2018.

Accounts Receivable

Customer receivables are non-interest bearing and are initially recorded at cost. The Company generally does not request collateral from its customers; however, it usually obtains a lien or other security interest in certain customers’ equipment placed in the Company’s data center, and/or obtains a deposit. The Company maintains an allowance for doubtful accounts for estimated losses up to the full amount of invoices based on the age of the invoices. If the financial condition of the Company’s customers were to deteriorate or if they became insolvent, resulting in an impairment of their ability to make payments, greater allowances for doubtful accounts may be required. Management specifically analyzes accounts receivable and current economic news and trends, historical bad debt, customer concentrations, customer credit-worthiness, and changes in customer payment terms when evaluating the adequacy of the Company’s reserves. Delinquent account balances are written off after management has determined the likelihood of collection is not probable. The Company recorded a benefit for doubtful accounts of $0.1 million during the year ended December 31, 2019 and bad debt expense of $0.2 million and $0.4 million during the years ended December 31, 2018 and 2017, respectively.

Leases

The Company determines if an arrangement is or contains a lease at inception or modification of the arrangement. An arrangement is or contains a lease if there are identified assets and the right to control the use of an identified asset is conveyed for a period in exchange for consideration. Control over the use of the identified assets means the lessee has both the right to obtain substantially all of the economic benefits from the use of the asset and the right to direct the use of the asset.

For lessee leases, the Company recognizes right-of-use (“ROU”) assets and lease liabilities for all leases other than those with a term of 12 months or less as the Company has elected to apply the short-term lease recognition exemption. ROU assets represent the Company’s right to use an underlying asset for the lease term. Lease liabilities represent the Company’s obligation to make lease payments arising from the lease. ROU assets and lease liabilities are classified and recognized at the commencement date of a lease. Lease liabilities are measured based on the present value of fixed lease payments over the lease term. ROU assets consist of (i) initial measurement of the lease liability; (ii) lease payments made to the lessor at or before the commencement date less any lease incentives received; and (iii) initial direct costs incurred by the Company. Lease payments may vary because of changes in facts or circumstances occurring after the commencement, including changes in inflation indices. Variable lease payments are excluded from the measurement of ROU assets and lease liabilities and are recognized in the period in which the obligation for those payments is incurred.

As the Company’s lessee leases do not provide a readily determinable implicit rate, the Company uses its incremental borrowing rate based on information available at the commencement date in determining the present value of lease payments. When determining the incremental borrowing rate, the Company assesses multiple variables such as lease term, collateral, economic conditions, and credit-worthiness. The Company estimates its incremental borrowing rate using a benchmark senior unsecured yield curve for debt instruments adjusted for its credit quality, market conditions, tenor of lease contracts, and collateral.

For income statement purposes, the Company recognizes rent expense on a straight-line basis for operating leases. For finance leases, the Company recognizes interest expense associated with the lease liability and depreciation expense associated with the ROU asset. For ROU assets held under finance leases and leasehold improvements, the estimated useful lives are limited to the shorter of the useful life of the asset or the term of the lease.

Many of the Company’s lease arrangements include options to extend the lease, which the Company does not include in its expected lease terms unless they are reasonably certain to be exercised. The Company has lease arrangements with lease and non-lease components. The Company has elected to apply the practical expedient to combine lease and related non-lease components for all classes of underlying assets and shall account for the combined component as a lease component.

Property and Equipment

Property and equipment is stated at cost. Depreciation and amortization of property and equipment is computed using the straight-line method over the estimated useful lives of the respective assets. The cost and accumulated depreciation of property and equipment retired or otherwise disposed of are eliminated from the respective accounts and any resulting gain or loss is included in operations. Costs of repairs and maintenance are expensed as incurred. For assets used in data center operations, the related depreciation and amortization are included in cost of revenue.

The Company’s estimated useful lives of its property and equipment are as follows (in years):



Assets	Estimated Useful Lives
Land improvements	20-30
Buildings, building improvements and leasehold improvements	3-40
Substation equipment	30
Data center equipment	5-10
Vehicles	7
Core network equipment	5-7
Cloud computing equipment	5
Fiber facilities	20, 25
Computer equipment, furniture and fixtures	3-5

The Company capitalizes certain costs incurred in connection with developing or obtaining internal use software. Capitalized software costs placed into service are included in computer equipment, furniture and fixtures and are amortized on a straight-line basis over a three-year period. Software costs that do not meet capitalization criteria are expensed immediately. The Company capitalized internal use software costs of $2.3 million, $1.4 million, and $1.8 million during the years ended December 31, 2019, 2018, and 2017, respectively.

In addition, the Company capitalizes interest costs during the construction phase of data centers. Once a data center or expansion project becomes operational, these costs are allocated to certain property and equipment categories and are depreciated over the estimated useful life of the underlying assets.

Impairment of Long‑Lived Assets

The Company’s long‑lived assets, such as property and equipment, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset or asset group may not be recoverable. Recoverability of assets to be held and used is measured by comparison of the carrying amount of an asset group to estimated undiscounted future cash flows expected to be generated by the asset group. If the carrying amount of an asset group exceeds its estimated future cash flows, an impairment charge is recognized in the amount by which the carrying amount of the asset group exceeds the fair value of the asset group.

Portfolio Energy Credits

The Company records portfolio energy credits (“PECs”) at their cost when purchased as an intangible asset, subject to impairment testing, within other assets on the consolidated balance sheets. PECs are not considered outputs by the Company. Amortization of PECs is recorded within cost of revenue on the consolidated statements of comprehensive income (loss) when PECs are utilized in operations. A summary of the Company’s PECs as of the end of each period presented is as follows:



	December 31,
	2019			2018
	(in thousands)
PECs, gross	$	5,352		$	3,649
Accumulated amortization	(5,352		)	(3,508		)
PECs, net	$	—		$	141

Commitments and Contingencies

The Company accrues for commitments and contingencies when management, after considering the facts and circumstances of each matter as then known to management, has determined it is probable a liability has been incurred and the amount of the loss can be reasonably estimated. When only a range of amounts is reasonably estimable and no amount within the range is more likely than another, the low end of the range is recorded. Legal fees are expensed as incurred. Due to the inherent uncertainties surrounding gain contingencies, the Company does not recognize potential gains until realized.

Debt Issuance Costs

Costs incurred in obtaining certain debt financing are deferred and amortized over the terms of the related debt instruments using the straight line-method for both term debt, which approximates the interest method, and revolving debt. As of December 31, 2019 and 2018, unamortized debt issuance costs totaled $5.7 million and $7.3 million, respectively, of which $2.1 million and $2.9 million, respectively, were included within other assets on the consolidated balance sheets.

Foreign Currency Translation

SUPERNAP International, S.A. (“SUPERNAP International”), an equity method investment of the Company, has investments in foreign subsidiaries. The Company’s share of gains or losses from translation of SUPERNAP International’s foreign operations where the local currency is the functional currency is included in other comprehensive income.

Revenue Recognition

During each of the years ended December 31, 2019, 2018, and 2017, the Company derived more than 95% of its revenue from recurring revenue streams, consisting primarily of (1) colocation, which includes the licensing and leasing of cabinet space and power and (2) connectivity services, which includes cross-connects, broadband services, and external connectivity. The remainder of the Company’s revenue is from non-recurring revenue, which primarily includes installation services related to a customer’s initial deployment. The majority of the Company’s revenue contracts are classified as licenses and accounted for in accordance with Accounting Standards Codification (“ASC”) 606, Revenue from Contracts with Customers (“ASC 606”), with the exception of certain contracts that contain lease components and are accounted for in accordance with ASC 842, Leases (“ASC 842”).

The Company recognizes revenue when control of these goods and services is transferred to its customers in an amount that reflects the consideration it expects to be entitled to in exchange for those goods and services. Revenue from recurring revenue streams is generally billed monthly and recognized using a time-based measurement of progress as customers receive service benefits evenly throughout the term of the contract, which is generally three to five years. Non-recurring installation fees, although generally paid in a lump sum upon installation, are deferred and recognized ratably over the contract term, determined using a portfolio approach. Non-recurring installation fees are not assessed as performance obligations as they are determined to be immaterial in the context of the contract with the customer. Revenue is generally recognized on a gross basis as a principal versus on a net basis as an agent, largely because the Company is primarily responsible for fulfilling the contract, takes title to services, bears credit risk, and has discretion in establishing the price when selling to the customer.

For contracts with customers that contain multiple performance obligations, the Company accounts for individual performance obligations separately if they are distinct or as a series of distinct obligations if the individual performance obligations meet the series criteria. Determining whether products and services are considered distinct performance obligations that should be accounted for separately versus together may require significant judgment. The transaction price of a contract is allocated to each distinct performance obligation on a relative standalone selling price basis. The standalone selling price is determined by maximizing observable inputs such as overall pricing objectives, customer credit history, and other factors. Other judgments include determining if any variable consideration should be included in the total contract value of the arrangement, such as price increases. Any variable consideration included in the total contract value of the arrangement is allocated to each distinct obligation, or series of distinct obligations, in an amount that depicts the consideration to which the Company expects to be entitled in exchange for transferring the underlying goods or services to the customer. The Company has also made the accounting policy election to exclude taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction and collected by the Company from a customer from its measurement of the transaction price.

Occasionally, the Company enters into contracts with customers for data center space and office space, which contain lease components. The Company’s leases with customers are generally classified as operating leases and lease payments are recognized on a straight-line basis over the lease term. Lease revenue related to data center space is included within colocation revenue, while lease revenue related to office space is included within other revenue.

The Company guarantees certain service levels, such as uptime, as outlined in individual customer contracts. If these standard service levels are not achieved, the Company would reduce revenue for any credits given to the customer as a result. There were no service level credits issued during the years ended December 31, 2019, 2018, and 2017.

Contract Balances

The Company generally invoices customers in monthly installments payable in advance. The difference between the timing of revenue recognition, and the timing of billings and cash collections results in the recognition of accounts receivable, contract assets, and deferred revenue (contract liabilities) on the consolidated balance sheets. Receivables are recorded at invoice amounts, net of allowance for doubtful accounts, and are recognized in the period when the Company has transferred goods or provided services to its customers, and when its right to consideration for that transfer is unconditional. Payment terms and conditions vary by contract type, although terms generally include a requirement of payment within 15 to 30 days of the invoice date. In instances where the timing of revenue recognition differs from the timing of invoicing, the Company has determined that its contracts generally do not include a significant financing component. The Company assesses collectability based on a number of factors, including past transaction history with the customer and the creditworthiness of the customer.

A contract asset exists when the Company has transferred products or provided services to its customers, but customer payment is contingent upon future satisfaction of a performance obligation. Certain contracts include terms related to price arrangements and allocations of consideration to multiple performance obligations recognized over differing periods of time. The Company generally recognizes revenue ratably over the contract term, which could potentially give rise to contract assets during certain periods of the contract term.

Deferred revenue represents amounts that are recognized when the Company has an unconditional right to a payment, which has been either billed to, or collected from, customers prior to transferring control of the underlying good or service to the customer.

The opening and closing balances of the Company’s contract assets and deferred revenue are as follows:



	Contract assets, current portion⁽¹⁾		Contract assets⁽²⁾		Deferred revenue, current portion		Deferred revenue
	(in thousands)
January 1, 2019	$	145	$	2,845	$	12,322	$	18,084
December 31, 2019	496		3,216		14,991		27,852
Increase	$	351	$	371	$	2,669	$	9,768

________________________________________


(1)	Contract assets, current portion are included within other current assets of the Company’s consolidated balance sheet as of December 31, 2019.


(2)	Contract assets are included within other assets of the Company’s consolidated balance sheet as of December 31, 2019.

The differences between the opening and closing balances of the Company’s deferred revenue primarily result from timing differences between the Company’s satisfaction of performance obligations and associated customer payments. Revenue recognized during the year ended December 31, 2019 from the opening balance of deferred revenue was $12.5 million. For the year ended December 31, 2019, no impairment losses related to contract balances were recognized on the consolidated statement of comprehensive income (loss).

Contract Costs

Contract costs include the Company’s incremental direct costs of either obtaining or fulfilling a contract, which primarily consist of sales commissions and bonuses. Contract costs are deferred and amortized on a straight-line basis over the estimated period of benefit. The Company elected to apply the practical expedient to expense contract costs when incurred if the amortization period is one year or less.

As of December 31, 2019, there were deferred contract costs of $1.5 million included in other assets on the Company’s consolidated balance sheet. For the year ended December 31, 2019, $0.4 million of deferred contract costs were amortized to selling, general and administrative expense on the Company’s consolidated statement of comprehensive income (loss).

Remaining Performance Obligations

Remaining performance obligations represent contracted revenue that has not yet been recognized, which includes deferred revenue and amounts that will be invoiced and recognized in future periods. These amounts as of December 31, 2019 were $783.7 million, 34%, 40%, and 15% of which is expected to be recognized over the next year, one to three years, and three to five years, respectively, with the remainder recognized thereafter. The remaining performance obligations do not include estimates of variable consideration related to unsatisfied performance obligations, such as the usage of metered power, or any contracts that could be terminated without significant penalties. The Company elected to apply the practical expedient that allows the Company not to disclose variable consideration allocated to remaining performance obligations that are either entirely or partially unsatisfied and form part of a single obligation.

Income Taxes

Switch, Inc. is taxed as a corporation and incurs U.S. federal, state, and local income taxes on its allocable share of taxable income or loss of Switch, Ltd. Switch, Ltd. operates as a partnership for federal, state, and local tax reporting. Members are liable for any income taxes resulting from their allocable portion of taxable income or loss of Switch, Ltd. as a pass-through entity.

For tax years beginning on or after January 1, 2018, Switch, Ltd. is subject to partnership audit rules enacted as part of the Bipartisan Budget Act of 2015 (the “Centralized Partnership Audit Regime”). Under the Centralized Partnership Audit Regime, any audit of Switch, Ltd. by the Internal Revenue Service (“IRS”) would be conducted at the partnership level, and if the IRS determines an adjustment, the default rule is that the partnership would pay an “imputed underpayment” including interest and penalties, if applicable. Switch, Ltd. may instead elect to make a “push-out” election, in which case the partners for the year that is under audit would be required to take into account the adjustments on their own personal income tax returns. The Switch Operating Agreement does not stipulate how Switch, Ltd. will address imputed underpayments. If Switch, Ltd. receives an imputed underpayment, a determination will be made based on the relevant facts and circumstances that exist at that time.

The Company accounts for income taxes pursuant to the asset and liability method, which requires the recognition of deferred income tax assets and liabilities based on temporary differences between the carrying amounts and tax bases of assets and liabilities using enacted statutory tax rates applicable to the periods in which the temporary differences are expected to reverse. Any effects of changes in income tax rates or laws are included in income tax expense (benefit) in the period of enactment.

Deferred tax assets represent future tax deductions or credits. Realization of deferred tax assets ultimately depends on the existence of sufficient taxable income of the appropriate character in either the carryback or carryforward period. Each reporting period, the Company assesses the weight of all positive and negative evidence available and reduces the carrying amounts of deferred tax assets by a valuation allowance if it is more likely than not that such assets will not be realized. A comprehensive assessment of all forms of positive and negative evidence is performed on an annual basis and such assessment is updated during each interim period for significant changes.

The Company utilizes a two-step process to record uncertain income tax positions in which (1) the Company determines if the weight of available evidence indicates it is more likely than not that the tax position for recognition will be sustained on the basis of its technical merits and (2) for those tax positions meeting the more likely than not recognition threshold, the Company recognizes the largest amount of tax benefit that is more than 50% likely of being realized upon ultimate settlement with the related tax authority. The Company includes interest and penalties related to income taxes within the provision for income taxes. See Note 10 “Income Taxes” for additional information.

Tax Receivable Agreement

In connection with the IPO, the Company entered into a TRA with Switch, Ltd. and the Members. In the event that such parties exchange any or all of their Common Units for Class A common stock, the TRA requires the Company to make payments to such holders for 85% of the tax benefits realized, or in some cases deemed to be realized, by the Company by such exchange as a result of (i) increases in the Company’s tax basis of its ownership interest in the net assets of Switch, Ltd. resulting from any redemptions or exchanges of noncontrolling interest, (ii) tax basis increases attributable to payments made under the TRA, and (iii) deductions attributable to imputed interest pursuant to the TRA (the “TRA Payments”). The annual tax benefits are computed by calculating the income taxes due, including such tax benefits, and the income taxes due without such benefits. The Company expects to benefit from the remaining 15% of any tax benefits that it may actually realize. The TRA Payments are not conditioned upon any continued ownership interest in Switch, Ltd. or the Company. The rights of each noncontrolling interest holder under the TRA are assignable to transferees of its interest.

The timing and amount of aggregate payments due under the TRA may vary based on a number of factors, including the amount and timing of the taxable income the Company generates each year and the tax rate then applicable. The Company calculates the liability under the TRA using a complex TRA model, which includes a significant assumption related to the fair market value of property and equipment. The payment obligations under the TRA are obligations of Switch, Inc. and not of Switch, Ltd. Payments are generally due under the TRA within a specified period of time following the filing of the Company’s tax return for the taxable year with respect to which the payment obligation arises, although interest on such payments will begin to accrue at a rate of LIBOR plus 100 basis points from the due date (without extensions) of such tax return. Any late payments that may be made under the TRA will continue to accrue interest at LIBOR plus 500 basis points until such payments are subsequently made. See Note 10 “Income Taxes” for additional information.

Advertising Costs

Equity-Based Compensation

Equity-based compensation cost is measured at the grant date for all equity-based awards made to employees based on the fair value of the awards and is attributed on a straight-line basis for awards with service conditions and on an accelerated attribution basis for awards with performance conditions over the requisite service period, which is generally the vesting period.

The Company used the Black-Scholes option-pricing model to determine the fair value of Switch, Ltd.’s incentive unit awards. The determination of the fair value of the incentive unit awards was affected by assumptions regarding a number of complex and subjective variables including the fair value of Switch, Ltd.’s member equity units, the expected price volatility of the member equity units over the term of the awards and actual and projected employee purchase behaviors. Switch, Ltd.’s member equity units’ fair value per unit was estimated using a weighted average approach of a combination of the following three methods: (1) publicly traded data center company multiples; (2) data center precedent transaction multiples; and (3) the discounted cash flow method based on Switch, Ltd.’s five-year forecast. The weighting of these three methods varied over time. Switch, Ltd. estimated the expected volatility by analyzing the volatility of companies in the same industry and selecting volatility within the range. The risk-free interest rate was based on United States Treasury zero-coupon issues with remaining terms similar to the expected term of the incentive unit awards. The expected dividend rate was determined at the grant date for each incentive unit award. The expected term of the incentive unit award was calculated by analyzing historical exercise data and obtaining the weighted average of the holding period for the incentive unit awards. Common Unit awards were measured based on the fair market value of the underlying unit on the date of grant.

The Company uses the Black-Scholes option-pricing model to determine the fair value of Switch, Inc.’s stock option awards. Switch, Inc. estimates the expected volatility by using a weighted average of the historical volatility of its common stock and the historical volatilities of a peer group comprised of publicly-traded companies in the same industry. The risk-free interest rate is based on United States Treasury zero-coupon issues with remaining terms similar to the expected term of the stock option awards. The expected dividend rate is based on the Company’s estimate of annual dividends expected to be paid at the time of grant. The expected term for stock options granted is estimated using the “simplified” method; whereby, the expected term equals the arithmetic average of the vesting term and the original contractual term of the stock option due to Switch, Inc.’s lack of sufficient historical data. Switch, Inc.’s restricted stock and restricted stock unit awards are measured based on the fair market value of the underlying common stock on the date of grant.

Net Income (Loss) per Share

Basic net income (loss) per share is computed by dividing net income (loss) attributable to Switch, Inc. by the weighted average number of shares outstanding during the period. Diluted net income (loss) per share is computed giving effect to all potential weighted average dilutive shares, including stock options, restricted stock units, dividend equivalent units, restricted stock awards, and Common Units convertible into shares of Class A common stock during the period. The dilutive effect of outstanding awards, if any, is reflected in diluted earnings per share by application of the treasury stock method or if-converted method, as applicable. Refer to Note 14 for further information on net income (loss) per share.

Fair Value Measurements

Information about the Company’s financial assets and liabilities measured at fair value on a recurring basis is presented below:



		December 31, 2019
	Balance Sheet Classification	Carrying Value		Level 1		Level 2		Level 3
		(in thousands)
Liabilities:
Interest rate swaps	Accrued expenses	$	3,464	$	—	$	3,464	$	—
Interest rate swaps	Other long-term liabilities	$	10,550	$	—	$	10,550	$	—



		December 31, 2018
	Balance Sheet Classification	Carrying Value		Level 1		Level 2		Level 3
		(in thousands)
Assets:
Cash equivalents	Cash and cash equivalents	$	53,293	$	53,293	$	—	$	—

Derivative Financial Instruments

A derivative is a financial instrument whose value changes in response to an underlying variable, requires little or no initial net investment, and is settled at a future date. Derivatives are initially recognized on the consolidated balance sheets at fair value on the date on which the derivatives are entered into and subsequently re-measured at fair value. Derivatives are separated into their current and long-term components based on the timing of the estimated cash flows as of the end of each reporting period.

Embedded derivatives included in hybrid instruments are treated and disclosed as separate derivatives when their economic characteristics and risks are not closely related to those of the host contract, the terms of the embedded derivative are the same as those of a stand-alone derivative, and the combined contract is not measured at fair value through earnings. The financial host contracts are accounted for and measured using the applicable GAAP of the relevant financial instrument category.

The method of recognizing fair value gains and losses depends on whether the derivatives are designated as hedging instruments, and if so, the nature of the hedge relationship. All gains and losses from changes in the fair values of derivatives that do not qualify for hedge accounting are recognized immediately in earnings. Cash flows from derivatives not designated as hedging instruments are classified in accordance with the nature of the derivative instrument and how it is used in the context of the Company’s business.

The Company enters into interest rate swap agreements to manage its interest rate risk associated with variable-rate borrowings. In January and February 2019, Switch, Ltd. entered into four interest rate swap agreements; whereby, Switch, Ltd. will pay a weighted average fixed interest rate (excluding the applicable interest margin) of 2.48% on notional amounts corresponding to borrowings of $400.0 million in exchange for receipts on the same notional amount at a variable interest rate based on the applicable LIBOR at the time of payment. The interest rate swap agreements mature in June 2024 and are not designated as hedging instruments. Losses from derivatives not designated as hedging instruments, inclusive of periodic net settlement amounts, were recorded in loss on interest rate swaps on the consolidated statements of comprehensive income (loss) and totaled $14.9 million for the year ended December 31, 2019.

Recent Accounting Pronouncements

ASU 2014-09–Revenue from Contracts with Customers

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU 2014-09”), and since that date has issued several additional ASUs intended to clarify certain aspects of ASU 2014-09 and to provide for certain practical expedients entities may elect upon adoption. The standard supersedes much of existing revenue recognition guidance and provides a comprehensive five-step model for entities to use in accounting for revenue arising from contracts with customers. The core principle of the standard is to recognize revenue when control of the promised goods or services is transferred to customers at an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services. In addition, the standard requires additional disclosure about the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers, including significant judgments and changes in judgments.

The Company adopted ASC 606 for the annual reporting period ending December 31, 2019 using the modified retrospective approach applied to contracts not completed as of January 1, 2019, and recognized a cumulative net increase to opening retained earnings of $0.2 million, net of income tax impacts. Results for reporting periods beginning after January 1, 2019 are presented under the new standard, while the comparative information has not been restated and continues to be reported under accounting standards in effect for those periods.

The cumulative effect of the changes made to the Company’s consolidated balance sheet as of January 1, 2019 from the adoption of ASC 606 was as follows:



	December 31, 2018		Adjustment Due to Adoption of ASC 606			January 1, 2019
	(in thousands)
Assets:
Other current assets	$	2,332	$	940		$	3,272
Other assets	$	17,050	$	(2,377	)	$	14,673
Deferred income taxes	$	28,550	$	(53	)	$	28,497
Liabilities:
Deferred revenue, current portion	$	10,800	$	1,522		$	12,322
Deferred revenue	$	22,260	$	(4,176	)	$	18,084
Equity:
Retained earnings	$	2,693	$	224		$	2,917
Noncontrolling interest	$	565,142	$	940		$	566,082

The most significant impact to the Company from the adoption of ASC 606 relates to installation revenue and the associated costs of installation. Under the new standard, the Company recognizes installation revenue and the associated costs of installation over the contract term rather than over the expected life of the installation.

The below tables summarize the effects of adopting ASC 606 on the following consolidated financial statement line items:



Balance Sheets	As Reported December 31, 2019		Adjustment Due to Adoption of ASC 606			As If Presented Under Prior Standard
	(in thousands)
Other current assets	$	3,817	$	(887	)	$	2,930
Total current assets	$	59,040	$	(887	)	$	58,153
Deferred income taxes	$	114,372	$	97		$	114,469
Other assets	$	45,785	$	3,390		$	49,175
Total assets	$	1,773,743	$	2,600		$	1,776,343

Deferred revenue, current portion	$	14,991	$	(1,545	)	$	13,446
Total current liabilities	$	113,930	$	(1,545	)	$	112,385
Deferred revenue	$	27,852	$	6,097		$	33,949
Total liabilities	$	1,146,098	$	4,552		$	1,150,650

Retained earnings	$	2,420	$	(451	)	$	1,969
Total Switch, Inc. stockholders’ equity	$	207,451	$	(451	)	$	207,000
Noncontrolling interest	$	420,194	$	(1,501	)	$	418,693
Total stockholders’ equity	$	627,645	$	(1,952	)	$	625,693
Total liabilities and stockholders’ equity	$	1,773,743	$	2,600		$	1,776,343



Statements of Comprehensive Income (Loss)	As Reported Year Ended December 31, 2019		Adjustment Due to Adoption of ASC 606			As If Presented Under Prior Standard
	(in thousands, except per share data)
Revenue	$	462,310	$	(1,898	)	$	460,412
Cost of revenue	$	242,679	$	(1,066	)	$	241,613
Gross profit	$	219,631	$	(832	)	$	218,799
Income from operations	$	76,927	$	(832	)	$	76,095
Income before income taxes	$	34,255	$	(832	)	$	33,423
Income tax expense	$	2,713	$	(44	)	$	2,669
Net income	$	31,542	$	(788	)	$	30,754
Net income attributable to noncontrolling interest	$	22,625	$	(561	)	$	22,064
Net income attributable to Switch, Inc.	$	8,917	$	(227	)	$	8,690

Basic net income per share	$	0.12	$	0.00		$	0.12
Diluted net income per share	$	0.11	$	0.00		$	0.11



Statements of Cash Flows	As Reported Year Ended December 31, 2019			Adjustment Due to Adoption of ASC 606			As If Presented Under Prior Standard
	(in thousands)
Cash flows from operating activities:
Net income	$	31,542		$	(788	)	$	30,754
Deferred income taxes	$	2,713		$	(44	)	$	2,669
Other current assets	$	(545	)	$	(53	)	$	(598	)
Other assets	$	3,447		$	(1,013	)	$	2,434
Deferred revenue	$	12,437		$	1,898		$	14,335
Net cash provided by operating activities	$	209,413		$	—		$	209,413

ASU 2016-02–Leases

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) (“ASU 2016-02”), and since that date has issued subsequent amendments to the initial guidance intended to clarify certain aspects of the guidance and to provide certain practical expedients entities can elect upon adoption. ASC 842 introduces new requirements to increase transparency and comparability among organizations for leasing transactions for both lessees and lessors. The principle of ASC 842 is that a lessee should recognize assets and liabilities that arise from leases. Lessees need to recognize a right-of-use asset and a lease liability for all leases (other than leases that meet the definition of a short-term lease). The liability is equal to the present value of lease payments. The asset is based on the liability. For income statement purposes, ASC 842 requires leases to be classified as either operating or finance. Operating leases result in a straight-line expense pattern while finance leases result in a front-loaded expense pattern. Lessor accounting remains largely unchanged, other than certain targeted improvements intended to align lessor accounting with the lessee accounting model and with the updated revenue recognition guidance.

The Company adopted ASC 842 effective January 1, 2019 using the modified retrospective approach and elected to apply the new guidance at the adoption date without adjusting comparative periods presented. Comparative information has not been restated and will continue to be reported under accounting standards in effect for those periods. In adopting the new guidance, the Company elected to apply the package of transition practical expedients, which allows the Company not to reassess (1) whether any expired or existing contracts contain leases under the new definition of a lease; (2) lease classification for any expired or existing leases; and (3) whether previously capitalized initial direct costs would qualify for capitalization under ASC 842. The Company also elected to apply the land easements practical expedient, which permits the Company not to assess at transition whether any expired or existing land easements are, or contain, leases if they were not previously accounted for as leases under the prior leasing standard. In transition, the Company did not elect to apply the hindsight practical expedient, which permits entities to use hindsight in determining the lease term and assessing impairment of right-of-use assets.

The Company elected to apply the short-term lease recognition exemption, and as such, shall not recognize right-of-use assets or lease liabilities for leases with a term of 12 months or less. The Company also elected to apply the practical expedient to combine lease and related non-lease components for all classes of underlying assets, and shall account for the combined component as a lease component under ASC 842, from both a lessee and lessor perspective.

Occasionally, as a lessor, the Company enters into contracts with customers for data center and office space accounted for under ASC 842. As these contracts may contain both lease and non-lease components, generally, lease and non-lease components which share the same pattern of transfer will be combined and accounted for as a single component, while non-lease components that do not have similar patterns of transfer, such as professional services, are excluded from combination. In addition, under ASC 842, certain exceptions under the previous standard for real estate no longer are applicable in the evaluation of the lease classification as an operating, sales-type, or direct financing lease. In the event that a real estate lease is classified as sales-type lease, subject to certain conditions, a gain or loss is recognized based on the present value of the lease payments and residual value.

The cumulative effect of the changes to the Company’s consolidated balance sheet as of January 1, 2019 from the adoption of ASC 842 was as follows:



	December 31, 2018		Adjustment Due to Adoption of ASC 842			January 1, 2019
	(in thousands)
Assets:
Operating lease ROU assets⁽¹⁾	$	—	$	35,486		$	35,486
Prepaid expenses	$	6,781	$	(419	)	$	6,362
Liabilities:
Accrued expenses	$	9,778	$	(722	)	$	9,056
Operating lease liability, current portion	$	—	$	4,455		$	4,455
Operating lease liability	$	—	$	31,334		$	31,334

________________________________________


(1)	Operating lease ROU assets are included within other assets on the Company’s consolidated balance sheet as of December 31, 2019.

ASU 2016-13–Financial Instruments–Credit Losses

In June 2016, the FASB issued ASU 2016-13, Financial Instruments–Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”). Under this guidance, a company will be required to use a new forward-looking “expected loss” model for trade and other receivables that generally will result in the earlier recognition of allowances for losses. The amendments in ASU 2016-13 are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years, and requires a modified retrospective approach to adoption. In April 2019, the FASB issued ASU 2019-04, which, among other amendments, allows for certain policy elections and practical expedients related to accrued interest on financial instruments. In May 2019, the FASB issued ASU 2019-05, which granted targeted transition relief by allowing entities to irrevocably elect the fair value option for certain financial assets previously measured at amortized cost. In November 2019, the FASB also issued ASU 2019-10 and ASU 2019-11, which addressed certain aspects of the guidance related to effective dates, expected recoveries, troubled debt restructurings, accrued interest receivables, and financial assets secured by collateral. The Company does not expect the adoption of this guidance to have a material impact on its consolidated financial statements.

ASU 2016-15–Statement of Cash Flows

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (“ASU 2016-15”). The areas affected by ASU 2016-15 are debt prepayment and debt extinguishment costs, settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing, contingent consideration payments made after a business combination, proceeds from the settlement of insurance claims, proceeds from the settlement of corporate-owned life insurance policies (including bank-owned life insurance policies), distributions received from equity method investees, beneficial interests in securitization transactions, and separately identifiable cash flows and application of the predominance principle. Specifically, under this guidance, cash payments for debt prepayment or debt extinguishment costs will be classified as cash outflows for financing activities. The Company has adopted this guidance for the annual reporting period ending December 31, 2019 retrospectively for all periods presented. Upon adoption of ASU 2016-15, for the year ended December 31, 2017, cash flows from operating activities increased by $1.5 million and cash flows provided by financing activities decreased by $1.5 million. The adoption of this guidance had no impact to the years ended December 31, 2019 and 2018.

ASU 2018-13–Fair Value Measurement

In August 2018, the FASB issued ASU 2018-13, Disclosure Framework–Changes to the Disclosure Requirements for Fair Value Measurement (“ASU 2018-13”). The amendments in this update modify the disclosure requirements for fair value measurements by removing, modifying, or adding certain disclosures. The amendments in ASU 2018-13 are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. In addition, in November 2018, the FASB issued ASU 2018-19, which provides clarifications and improvements on sections of ASU 2018-13. The Company does not expect the adoption of this guidance to have a material impact on its consolidated financial statements.

ASU 2019-12–Income Taxes

In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (“ASU 2019-12”). The amendments in ASU 2019-12 provide certain clarifications and simplify accounting for income taxes by removing certain exceptions to the general principles in the current guidance. The amendments in ASU 2019-12 are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. Early adoption is permitted in periods for which financial statements have not yet been issued. The Company is evaluating the impact the adoption of this guidance will have on its consolidated financial statements. The Company has not decided if early adoption will be considered.

Share-based Compensation, Option and Incentive Plans Policy [Policy Text Block]

Equity-Based Compensation

Earnings Per Share, Policy [Policy Text Block]

Net Income (Loss) per Share

Income Tax, Policy [Policy Text Block]

Income Taxes

Foreign Currency Transactions and Translations Policy [Policy Text Block]

Foreign Currency Translation

Commitments and Contingencies, Policy [Policy Text Block]

Commitments and Contingencies

Property, Plant and Equipment, Impairment [Policy Text Block]

Impairment of Long‑Lived Assets

Lessee, Leases [Policy Text Block]

Leases

Receivables, Policy [Policy Text Block]

Accounts Receivable

Concentration of Credit and Other Risks

Derivative Financial Instruments

Recent Accounting Pronouncements

ASU 2014-09–Revenue from Contracts with Customers

The cumulative effect of the changes made to the Company’s consolidated balance sheet as of January 1, 2019 from the adoption of ASC 606 was as follows:



	December 31, 2018		Adjustment Due to Adoption of ASC 606			January 1, 2019
	(in thousands)
Assets:
Other current assets	$	2,332	$	940		$	3,272
Other assets	$	17,050	$	(2,377	)	$	14,673
Deferred income taxes	$	28,550	$	(53	)	$	28,497
Liabilities:
Deferred revenue, current portion	$	10,800	$	1,522		$	12,322
Deferred revenue	$	22,260	$	(4,176	)	$	18,084
Equity:
Retained earnings	$	2,693	$	224		$	2,917
Noncontrolling interest	$	565,142	$	940		$	566,082

The below tables summarize the effects of adopting ASC 606 on the following consolidated financial statement line items:



Balance Sheets	As Reported December 31, 2019		Adjustment Due to Adoption of ASC 606			As If Presented Under Prior Standard
	(in thousands)
Other current assets	$	3,817	$	(887	)	$	2,930
Total current assets	$	59,040	$	(887	)	$	58,153
Deferred income taxes	$	114,372	$	97		$	114,469
Other assets	$	45,785	$	3,390		$	49,175
Total assets	$	1,773,743	$	2,600		$	1,776,343

Deferred revenue, current portion	$	14,991	$	(1,545	)	$	13,446
Total current liabilities	$	113,930	$	(1,545	)	$	112,385
Deferred revenue	$	27,852	$	6,097		$	33,949
Total liabilities	$	1,146,098	$	4,552		$	1,150,650

Retained earnings	$	2,420	$	(451	)	$	1,969
Total Switch, Inc. stockholders’ equity	$	207,451	$	(451	)	$	207,000
Noncontrolling interest	$	420,194	$	(1,501	)	$	418,693
Total stockholders’ equity	$	627,645	$	(1,952	)	$	625,693
Total liabilities and stockholders’ equity	$	1,773,743	$	2,600		$	1,776,343



Statements of Comprehensive Income (Loss)	As Reported Year Ended December 31, 2019		Adjustment Due to Adoption of ASC 606			As If Presented Under Prior Standard
	(in thousands, except per share data)
Revenue	$	462,310	$	(1,898	)	$	460,412
Cost of revenue	$	242,679	$	(1,066	)	$	241,613
Gross profit	$	219,631	$	(832	)	$	218,799
Income from operations	$	76,927	$	(832	)	$	76,095
Income before income taxes	$	34,255	$	(832	)	$	33,423
Income tax expense	$	2,713	$	(44	)	$	2,669
Net income	$	31,542	$	(788	)	$	30,754
Net income attributable to noncontrolling interest	$	22,625	$	(561	)	$	22,064
Net income attributable to Switch, Inc.	$	8,917	$	(227	)	$	8,690

Basic net income per share	$	0.12	$	0.00		$	0.12
Diluted net income per share	$	0.11	$	0.00		$	0.11



Statements of Cash Flows	As Reported Year Ended December 31, 2019			Adjustment Due to Adoption of ASC 606			As If Presented Under Prior Standard
	(in thousands)
Cash flows from operating activities:
Net income	$	31,542		$	(788	)	$	30,754
Deferred income taxes	$	2,713		$	(44	)	$	2,669
Other current assets	$	(545	)	$	(53	)	$	(598	)
Other assets	$	3,447		$	(1,013	)	$	2,434
Deferred revenue	$	12,437		$	1,898		$	14,335
Net cash provided by operating activities	$	209,413		$	—		$	209,413

ASU 2016-02–Leases

The cumulative effect of the changes to the Company’s consolidated balance sheet as of January 1, 2019 from the adoption of ASC 842 was as follows:



	December 31, 2018		Adjustment Due to Adoption of ASC 842			January 1, 2019
	(in thousands)
Assets:
Operating lease ROU assets⁽¹⁾	$	—	$	35,486		$	35,486
Prepaid expenses	$	6,781	$	(419	)	$	6,362
Liabilities:
Accrued expenses	$	9,778	$	(722	)	$	9,056
Operating lease liability, current portion	$	—	$	4,455		$	4,455
Operating lease liability	$	—	$	31,334		$	31,334

________________________________________


(1)	Operating lease ROU assets are included within other assets on the Company’s consolidated balance sheet as of December 31, 2019.

ASU 2016-13–Financial Instruments–Credit Losses

ASU 2016-15–Statement of Cash Flows

ASU 2018-13–Fair Value Measurement

ASU 2019-12–Income Taxes

Property, Plant and Equipment, Policy [Policy Text Block]

Property and Equipment

The Company’s estimated useful lives of its property and equipment are as follows (in years):



Assets	Estimated Useful Lives
Land improvements	20-30
Buildings, building improvements and leasehold improvements	3-40
Substation equipment	30
Data center equipment	5-10
Vehicles	7
Core network equipment	5-7
Cloud computing equipment	5
Fiber facilities	20, 25
Computer equipment, furniture and fixtures	3-5

Debt Issuance Costs [Policy Text Block]

Debt Issuance Costs

Revenue Recognition, Policy [Policy Text Block]

Revenue Recognition

Contract Balances

The opening and closing balances of the Company’s contract assets and deferred revenue are as follows:



	Contract assets, current portion⁽¹⁾		Contract assets⁽²⁾		Deferred revenue, current portion		Deferred revenue
	(in thousands)
January 1, 2019	$	145	$	2,845	$	12,322	$	18,084
December 31, 2019	496		3,216		14,991		27,852
Increase	$	351	$	371	$	2,669	$	9,768

________________________________________


(1)	Contract assets, current portion are included within other current assets of the Company’s consolidated balance sheet as of December 31, 2019.


(2)	Contract assets are included within other assets of the Company’s consolidated balance sheet as of December 31, 2019.

Contract Costs

Remaining Performance Obligations

Tax Receivable Agreement, Policy [Policy Text Block]

Tax Receivable Agreement

Portfolio Energy Credits [Policy Text Block]

Portfolio Energy Credits



	December 31,
	2019			2018
	(in thousands)
PECs, gross	$	5,352		$	3,649
Accumulated amortization	(5,352		)	(3,508		)
PECs, net	$	—		$	141