Nature of Operations, Basis of Presentation and Change in Accounting Principle

9 Months Ended

Sep. 30, 2016

Organization, Consolidation and Presentation of Financial Statements [Abstract]

Nature of Operations and Basis of Presentation

A.  Nature of operations

Information in our financial statements and related commentary are presented in the following categories:

Machinery, Energy & Transportation – Represents the aggregate total of Construction Industries, Resource Industries, Energy & Transportation and All Other operating segments and related corporate items and eliminations.

Financial Products – Primarily includes the company’s Financial Products Segment.  This category includes Caterpillar Financial Services Corporation (Cat Financial), Caterpillar Financial Insurance Services (Insurance Services) and their respective subsidiaries.

B.  Basis of presentation

In the opinion of management, the accompanying unaudited financial statements include all adjustments, consisting only of normal recurring adjustments, necessary for a fair statement of (a) the consolidated results of operations for the three and nine months ended September 30, 2016 and 2015, (b) the consolidated comprehensive income for the three and nine months ended September 30, 2016 and 2015, (c) the consolidated financial position at September 30, 2016 and December 31, 2015, (d) the consolidated changes in stockholders’ equity for the nine months ended September 30, 2016 and 2015 and (e) the consolidated cash flow for the nine months ended September 30, 2016 and 2015.  The financial statements have been prepared in conformity with generally accepted accounting principles in the United States of America (U.S. GAAP) and pursuant to the rules and regulations of the Securities and Exchange Commission (SEC).

Interim results are not necessarily indicative of results for a full year. The information included in this Form 10-Q should be read in conjunction with the audited financial statements and notes thereto included in our company’s annual report on Form 10-K for the year ended December 31, 2015 (2015 Form 10-K), which were retrospectively adjusted in the Current Report on Form 8-K filed with the SEC on May 16, 2016.

The December 31, 2015 financial position data included herein is derived from the audited consolidated financial statements included in the 2015 Form 10-K, which were retrospectively adjusted in the Current Report on Form 8-K filed with the SEC on May 16, 2016, but does not include all disclosures required by U.S. GAAP.  Certain amounts for prior periods have been reclassified to conform to the current period financial statement presentation. See Note 1C, Note 2, Note 7 and Note 15 for more information.

Unconsolidated Variable Interest Entities (VIEs)

We have affiliates, suppliers and dealers that are VIEs of which we are not the primary beneficiary. Although we have provided financial support, we do not have the power to direct the activities that most significantly impact the economic performance of each entity.

Our maximum exposure to loss from VIEs for which we are not the primary beneficiary was as follows:

(Millions of dollars)	September 30, 2016		December 31, 2015
Receivables - trade and other	$	48	$	19
Receivables - finance	192		466
Long-term receivables - finance	253		62
Other assets	31		35
Guarantees	211		175
Total	$	735	$	757

Change in Accounting Principle

C.  Change in Accounting Principle

Effective January 1, 2016, we changed our accounting principle for recognizing actuarial gains and losses and expected returns on plan assets for our defined benefit pension and other postretirement benefit plans. Prior to 2016, actuarial gains and losses were recognized as a component of Accumulated other comprehensive income (loss) and were generally amortized into earnings in future periods. Under the new principle, actuarial gains and losses will be immediately recognized through net benefit cost upon the annual remeasurement in the fourth quarter, or on an interim basis as triggering events warrant remeasurement. In addition, we have changed our policy for recognizing the expected returns on plan assets from a market-related value method (based on a three-year smoothing of asset returns) to a fair value method. We believe these changes are preferable as they accelerate the recognition of changes in fair value of plan assets and actuarial gains and losses in our Consolidated Statement of Results of Operations, provide greater transparency of our economic obligations in accounting results and better align with the fair value principles by recognizing the effects of economic and interest rate changes on pension and other postretirement benefit assets and liabilities in the year in which the gains and losses are incurred. These changes have been applied retrospectively to prior years. As of January 1, 2015, the cumulative effect of the change resulted in a decrease of $5.4 billion in Profit employed in the business and a corresponding increase of $5.4 billion in Accumulated other comprehensive income (loss), both net of tax of $2.9 billion.

Following are the changes to financial statement line items as a result of the accounting principle change for the periods presented in the accompanying unaudited consolidated financial statements:

Consolidated Statement of Results of Operations
(Dollars in millions except per share data)
	Three Months Ended September 30, 2016							Three Months Ended September 30, 2015
	As Reported		Previous Accounting Method		Effect of Accounting Change			Recast			Previously Reported			Effect of Accounting Change
Cost of goods sold	$	6,527	$	6,588	$	(61	)	$	7,872		$	7,954		$	(82	)
Selling, general and administrative expenses	$	992	$	1,025	$	(33	)	$	1,129		$	1,225		$	(96	)
Research and development expenses	$	453	$	464	$	(11	)	$	513		$	534		$	(21	)
Other operating (income) expenses	$	560	$	560	$	—		$	381		$	394		$	(13	)
Total operating costs	$	8,679	$	8,784	$	(105	)	$	10,037		$	10,249		$	(212	)
Operating profit	$	481	$	376	$	105		$	925		$	713		$	212
Other income (expense)	$	28	$	13	$	15		$	(15	)	$	(68	)	$	53
Consolidated profit before taxes	$	383	$	263	$	120		$	783		$	518		$	265
Provision (benefit) for income taxes	$	96	$	55	$	41		$	218		$	144		$	74
Profit of consolidated companies	$	287	$	208	$	79		$	565		$	374		$	191
Profit of consolidated and affiliated companies	$	283	$	204	$	79		$	562		$	371		$	191
Profit	$	283	$	204	$	79		$	559		$	368		$	191
Profit per common share	$	0.48	$	0.35	$	0.13		$	0.95		$	0.63		$	0.32
Profit per common share - diluted	$	0.48	$	0.35	$	0.13		$	0.94		$	0.62		$	0.32
	Nine Months Ended September 30, 2016							Nine Months Ended September 30, 2015
	As Reported		Previous Accounting Method		Effect of Accounting Change			Recast			Previously Reported			Effect of Accounting Change
Cost of goods sold	$	20,768	$	20,949	$	(181	)	$	25,306		$	25,559		$	(253	)
Selling, general and administrative expenses	$	3,203	$	3,305	$	(102	)	$	3,696		$	3,932		$	(236	)
Research and development expenses	$	1,429	$	1,461	$	(32	)	$	1,547		$	1,612		$	(65	)
Other operating (income) expenses	$	1,356	$	1,356	$	—		$	1,032		$	1,068		$	(36	)
Total operating costs	$	27,203	$	27,518	$	(315	)	$	32,021		$	32,611		$	(590	)
Operating profit	$	1,760	$	1,445	$	315		$	3,960		$	3,370		$	590
Other income (expense)	$	112	$	60	$	52		$	107		$	76		$	31
Consolidated profit before taxes	$	1,487	$	1,120	$	367		$	3,686		$	3,065		$	621
Provision (benefit) for income taxes	$	372	$	252	$	120		$	1,074		$	870		$	204
Profit of consolidated companies	$	1,115	$	868	$	247		$	2,612		$	2,195		$	417
Profit of consolidated and affiliated companies	$	1,108	$	861	$	247		$	2,613		$	2,196		$	417
Profit	$	1,104	$	857	$	247		$	2,606		$	2,189		$	417
Profit per common share	$	1.89	$	1.47	$	0.42		$	4.36		$	3.66		$	0.70
Profit per common share - diluted	$	1.88	$	1.46	$	0.42		$	4.30		$	3.62		$	0.68

Consolidated Statement of Comprehensive Income
(Dollars in millions)
	Three Months Ended September 30, 2016								Three Months Ended September 30, 2015
	As Reported		Previous Accounting Method			Effect of Accounting Change			Recast			Previously Reported			Effect of Accounting Change
Profit of consolidated and affiliated companies	$	283	$	204		$	79		$	562		$	371		$	191
Foreign currency translation, net of tax	$	137	$	139		$	(2	)	$	(236	)	$	(235	)	$	(1	)
Pension and other postretirement benefits:
Current year actuarial gain (loss), net of tax	$	—	$	(2	)	$	2		$	—		$	44		$	(44	)
Amortization of actuarial (gain) loss, net of tax	$	—	$	79		$	(79	)	$	—		$	108		$	(108	)
Total other comprehensive income (loss), net of tax	$	106	$	185		$	(79	)	$	(268	)	$	(115	)	$	(153	)
Comprehensive income	$	389	$	389		$	—		$	294		$	256		$	38
Comprehensive income attributable to stockholders	$	389	$	389		$	—		$	292		$	254		$	38
	Nine Months Ended September 30, 2016								Nine Months Ended September 30, 2015
	As Reported		Previous Accounting Method			Effect of Accounting Change			Recast			Previously Reported			Effect of Accounting Change
Profit of consolidated and affiliated companies	$	1,108	$	861		$	247		$	2,613		$	2,196		$	417
Foreign currency translation, net of tax	$	442	$	447		$	(5	)	$	(806	)	$	(810	)	$	4
Pension and other postretirement benefits:
Current year actuarial gain (loss), net of tax	$	—	$	(5	)	$	5		$	—		$	68		$	(68	)
Amortization of actuarial (gain) loss, net of tax	$	—	$	237		$	(237	)	$	—		$	326		$	(326	)
Total other comprehensive income (loss), net of tax	$	508	$	745		$	(237	)	$	(811	)	$	(421	)	$	(390	)
Comprehensive income	$	1,616	$	1,606		$	10		$	1,802		$	1,775		$	27
Comprehensive income attributable to stockholders	$	1,612	$	1,602		$	10		$	1,804		$	1,777		$	27

Consolidated Statement of Financial Position
(Dollars in millions)
	September 30, 2016
	As Reported			Previous Accounting Method			Effect of Accounting Change
Noncurrent deferred and refundable income taxes	$	2,579		$	2,590		$	(11	)
Liability for postemployment benefits	$	8,499		$	8,520		$	(21	)
Profit employed in the business	$	29,450		$	34,165		$	(4,715	)
Accumulated other comprehensive income (loss)	$	(1,527	)	$	(6,252	)	$	4,725
	December 31, 2015
	Recast			Previously Reported			Effect of Accounting Change
Profit employed in the business	$	29,246		$	34,208		$	(4,962	)
Accumulated other comprehensive income (loss)	$	(2,035	)	$	(6,997	)	$	4,962

Consolidated Statement of Changes in Stockholders' Equity
(Dollars in millions)
	Nine Months Ended September 30, 2016
	As Reported			Previous Accounting Method			Effect of Accounting Change
Profit of consolidated and affiliated companies	$	1,108		$	861		$	247
Foreign currency translation, net of tax	$	442		$	447		$	(5	)
Pension and other postretirement benefits, net of tax	$	90		$	322		$	(232	)
Balance at September 30, 2016	$	15,715		$	15,705		$	10
	Nine Months Ended September 30, 2015
	Recast			Previously Reported			Effect of Accounting Change
Profit of consolidated and affiliated companies	$	2,613		$	2,196		$	417
Foreign currency translation, net of tax	$	(806	)	$	(810	)	$	4
Pension and other postretirement benefits, net of tax	$	(25	)	$	369		$	(394	)
Balance at September 30, 2015	$	15,995		$	15,968		$	27

Consolidated Statement of Cash Flow
(Millions of dollars)
	Nine Months Ended September 30, 2016
Cash flow from operating activities:	As Reported			Previous Accounting Method			Effect of Accounting Change
Profit of consolidated and affiliated companies	$	1,108		$	861		$	247
Adjustments for non-cash items: Other	$	640		$	692		$	(52	)
Other assets – net	$	(141	)	$	(261	)	$	120
Other liabilities – net	$	(291	)	$	24		$	(315	)
	Nine Months Ended September 30, 2015
Cash flow from operating activities:	Recast			Previously Reported			Effect of Accounting Change
Profit of consolidated and affiliated companies	$	2,613		$	2,196		$	417
Adjustments for non-cash items: Other	$	323		$	354		$	(31	)
Other assets – net	$	96		$	(108	)	$	204
Other liabilities – net	$	(236	)	$	354		$	(590	)

New accounting guidance

Revenue recognition – In May 2014, the Financial Accounting Standards Board (FASB) issued new revenue recognition guidance to provide a single, comprehensive revenue recognition model for all contracts with customers. Under the new guidance, an entity will recognize revenue to depict the transfer of promised goods or services to customers at an amount that the entity expects to be entitled to in exchange for those goods or services. A five step model has been introduced for an entity to apply when recognizing revenue. The new guidance also includes enhanced disclosure requirements, and is effective January 1, 2018, with early adoption permitted for January 1, 2017. Entities have the option to apply the new guidance under a retrospective approach to each prior reporting period presented, or a modified retrospective approach with the cumulative effect of initially applying the new guidance recognized at the date of initial application within the Consolidated Statement of Changes in Stockholders' Equity. We plan to adopt the new guidance effective January 1, 2018 and are in the process of evaluating the effect of the new guidance on our financial statements.

Variable interest entities (VIE) – In February 2015, the FASB issued accounting guidance on the consolidation of VIEs. The new guidance revises previous guidance by establishing an analysis for determining whether a limited partnership or similar entity is a VIE and whether outsourced decision-maker fees are considered variable interests. In addition, the new guidance revises how a reporting entity evaluates economics and related parties when assessing who should consolidate a VIE. The guidance was effective January 1, 2016 and did not have a material impact on our financial statements.

Presentation of debt issuance costs – In April 2015, the FASB issued accounting guidance which requires debt issuance costs to be presented in the balance sheet as a direct deduction from the carrying value of the associated debt liability. Prior to the issuance of the new guidance, debt issuance costs were required to be presented in the balance sheet as an asset. The guidance was effective January 1, 2016 and was applied retrospectively. The adoption did not have a material impact on our financial statements.

Fair value disclosures for investments in certain entities that calculate net asset value per share – In May 2015, the FASB issued accounting guidance which removes the requirement to categorize within the fair value hierarchy investments measured at net asset value (or its equivalent) as a practical expedient for fair value. The new guidance requires that the amount of these investments continue to be disclosed to reconcile the fair value hierarchy disclosure to the balance sheet. The guidance was effective January 1, 2016 and was applied retrospectively. The adoption did not have a material impact on our financial statements.

Simplifying the measurement of inventory – In July 2015, the FASB issued accounting guidance which requires that inventory be measured at the lower of cost or net realizable value. Prior to the issuance of the new guidance, inventory was measured at the lower of cost or market. Replacing the concept of market with the single measurement of net realizable value is intended to create efficiencies for preparers. Inventory measured using the last-in, first-out (LIFO) method and the retail inventory method are not impacted by the new guidance. The guidance is effective January 1, 2017. We do not expect the adoption to have a material impact on our financial statements.

Simplifying the accounting for measurement-period adjustments – In September 2015, the FASB issued accounting guidance which eliminates the requirement for an acquirer in a business combination to restate prior period financial statements for measurement period adjustments. An acquirer in a business combination is required to report provisional amounts when measurements are incomplete at the end of the reporting period covering the business combination. Prior to the issuance of the new guidance, an acquirer was required to adjust such provisional amounts by restating prior period financial statements. Under the new guidance, the acquirer will recognize the measurement-period adjustment in the period the adjustment is determined. The guidance was effective January 1, 2016 and was applied prospectively. The adoption did not have a material impact on our financial statements.

Balance sheet classification of deferred taxes– In November 2015, the FASB issued accounting guidance that requires all deferred tax assets and liabilities, along with any related valuation allowance, to be classified as noncurrent on the Consolidated Statement of Financial Position. Previous guidance requires the deferred taxes for each jurisdiction to be presented as a net current asset or liability and net noncurrent asset or liability. As a result of the new guidance, each jurisdiction will now only have one net noncurrent deferred tax asset or liability. The new guidance does not change the existing requirement that only permits offsetting deferred tax assets and liabilities within a single jurisdiction. We had the option to apply the new guidance prospectively or retrospectively. The new guidance is effective January 1, 2017, with early adoption permitted. We adopted the new guidance effective January 1, 2016 and applied it retrospectively. The adoption resulted in the reclassification of current deferred tax assets and liabilities to noncurrent assets and liabilities on the Consolidated Statement of Financial Position. For the year ended December 31, 2015, Deferred and refundable income taxes were reduced by $910 million (the remaining balance of $616 million was reclassified to Prepaid expenses and other current assets), Noncurrent deferred and refundable income taxes were increased by $835 million, Other current liabilities were reduced by $59 million and Other liabilities were reduced by $16 million.

Recognition and measurement of financial assets and financial liabilities– In January 2016, the FASB issued accounting guidance that affects the accounting for equity investments, financial liabilities accounted for under the fair value option and the presentation and disclosure requirements for financial instruments. Under the new guidance, all equity investments in unconsolidated entities (other than those accounted for using the equity method of accounting) will generally be measured at fair value through earnings. There will no longer be an available-for-sale classification for equity securities with readily determinable fair values. For financial liabilities when the fair value option has been elected, changes in fair value due to instrument-specific credit risk will be recognized separately in other comprehensive income. In addition, the FASB clarified guidance related to the valuation allowance assessment when recognizing deferred tax assets resulting from unrealized losses on available-for-sale debt securities. The new guidance is effective January 1, 2018, with the cumulative effect adjustment from initially applying the new guidance recognized in the Consolidated Statement of Financial Position as of the beginning of the year of adoption. The impact on our financial statements at the time of adoption will primarily be based on changes in the fair value of our available-for-sale equity securities subsequent to January 1, 2018, which will be recorded through earnings.

Lease accounting– In February 2016, the FASB issued accounting guidance that revises the accounting for leases. Under the new guidance, lessees are required to recognize a right-of-use asset and a lease liability for all leases. The new guidance will continue to classify leases as either financing or operating, with classification affecting the pattern of expense recognition. The accounting applied by a lessor under the new guidance will be substantially equivalent to current lease accounting guidance. The new guidance is effective January 1, 2019 with early adoption permitted. The new standard is required to be applied with a modified retrospective approach to each prior reporting period presented and provides for certain practical expedients. We are in the process of evaluating the effect of the new guidance on our financial statements.

Stock-based compensation– In March 2016, the FASB issued accounting guidance to simplify several aspects of the accounting for share-based payments. The new guidance changes how reporting entities account for certain aspects of share-based payments, including the accounting for income taxes and the classification of the tax impact on the Consolidated Statement of Cash Flow. Under the new guidance all excess tax benefits and deficiencies during the period are to be recognized in income (rather than equity) on a prospective basis. The guidance removes the requirement to delay recognition of excess tax benefits until it reduces income taxes currently payable. This change is required to be applied on a modified retrospective basis, resulting in a cumulative-effect adjustment to opening retained earnings in the period of adoption. In addition, Cash flows related to excess tax benefits will be included in Cash provided by operating activities and will no longer be separately classified as a financing activity. We plan to adopt this change retrospectively. The new guidance is effective January 1, 2017 with early adoption permitted. We plan to adopt the new guidance effective January 1, 2017, and we do not expect the adoption to have a material impact on our financial statements.

Measurement of credit losses on financial instruments– In June 2016, the FASB issued accounting guidance to introduce a new model for recognizing credit losses on financial instruments based on an estimate of current expected credit losses. The new guidance will apply to loans, accounts receivable, trade receivables, other financial assets measured at amortized cost, loan commitments and other off-balance sheet credit exposures. The new guidance will also apply to debt securities and other financial assets measured at fair value through other comprehensive income. The new guidance is effective January 1, 2020, with early adoption permitted beginning January 1, 2019. We are in the process of evaluating the effect of the new guidance on our financial statements.

Classification for certain cash receipts and cash payments– In August 2016, the FASB issued accounting guidance related to the presentation and classification of certain transactions in the statement of cash flows where diversity in practice exists. The guidance is effective January 1, 2018 with early adoption permitted. We do not expect the adoption to have a material impact on our financial statements.

Tax accounting for intra-entity asset transfers– In October 2016, the FASB issued accounting guidance that will require the tax effects of intra-entity asset transfers to be recognized in the period when the transfer occurs. Under current guidance, the tax effects of intra-entity sales of assets are deferred until the transferred asset is sold to a third party or otherwise recovered through use. The new guidance does not apply to intra-entity transfers of inventory. The guidance is effective January 1, 2018 with early adoption permitted and is required to be applied on a modified retrospective basis through a cumulative effect adjustment to retained earnings as of the beginning of the period of adoption. We are in the process of evaluating the effect of the new guidance on our financial statements.