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. The guidance was effective January 1, 2018, and was applied to contracts that were not completed at the date of initial application on a modified retrospective basis through a cumulative effect adjustment to retained earnings as of January 1, 2018. The prior period comparative information has not been recasted and continues to be reported under the accounting guidance in effect for those periods.

Under the new guidance, sales of certain turbine machinery units changed to a point-in-time recognition model. Under previous guidance, we accounted for these sales under an over-time model following the percentage-of-completion method as the product was manufactured. In addition, under the new guidance we began to recognize an asset for the value of expected replacement part returns and discontinued lease accounting treatment for certain product sales containing residual value guarantees.

See Note 3 for additional information.

The cumulative effect of initially applying the new revenue recognition guidance to our consolidated financial statements on January 1, 2018 was as follows:



Consolidated Statement of Financial Position
(Millions of dollars)	Balance as of December 31, 2017		Cumulative Impact from Adopting New Revenue Guidance			Balance as of January 1, 2018
Assets
Receivables - trade and other	$	7,436	$	(66	)	$	7,370
Prepaid expenses and other current assets	$	1,772	$	327		$	2,099
Inventories	$	10,018	$	4		$	10,022
Property, plant and equipment - net	$	14,155	$	(190	)	$	13,965
Noncurrent deferred and refundable income taxes	$	1,693	$	2		$	1,695

Liabilities
Accrued expenses	$	3,220	$	226		$	3,446
Customer advances	$	1,426	$	46		$	1,472
Other current liabilities	$	1,742	$	(17	)	$	1,725
Other liabilities	$	4,053	$	(166	)	$	3,887

Shareholders' equity
Profit employed in the business	$	26,301	$	(12	)	$	26,289

The impact from adopting the new revenue recognition guidance on our consolidated financial statements was as follows:



Consolidated Statement of Results of Operations	Three Months Ended June 30, 2018
	As Reported		Previous Accounting Guidance		Impact from Adopting New Revenue Guidance
(Millions of dollars)
Sales of Machinery, Energy & Transportation	$	13,279	$	13,330	$	(51	)
Cost of goods sold	$	9,422	$	9,463	$	(41	)
Operating profit	$	2,167	$	2,177	$	(10	)
Consolidated profit before taxes	$	2,186	$	2,196	$	(10	)
Provision (benefit) for income taxes	$	490	$	492	$	(2	)
Profit of consolidated companies	$	1,696	$	1,704	$	(8	)
Profit of consolidated and affiliated companies	$	1,705	$	1,713	$	(8	)
Profit	$	1,707	$	1,715	$	(8	)

Consolidated Statement of Results of Operations	Six Months Ended June 30, 2018
	As Reported		Previous Accounting Guidance		Impact from Adopting New Revenue Guidance
(Millions of dollars)
Sales of Machinery, Energy & Transportation	$	25,429	$	25,475	$	(46	)
Cost of goods sold	$	17,988	$	18,023	$	(35	)
Other operating (income) expenses	$	638	$	644	$	(6	)
Operating profit	$	4,275	$	4,280	$	(5	)
Consolidated profit before taxes	$	4,320	$	4,325	$	(5	)
Provision (benefit) for income taxes	$	962	$	963	$	(1	)
Profit of consolidated companies	$	3,358	$	3,362	$	(4	)
Profit of consolidated and affiliated companies	$	3,372	$	3,376	$	(4	)
Profit	$	3,372	$	3,376	$	(4	)

Consolidated Statement of Financial Position	June 30, 2018
	As Reported		Previous Accounting Guidance		Impact from Adopting New Revenue Guidance
(Millions of dollars)
Assets
Receivables - trade and other	$	7,991	$	8,019	$	(28	)
Prepaid expenses and other current assets	$	1,835	$	1,529	$	306
Inventories	$	11,255	$	11,223	$	32
Noncurrent deferred and refundable income taxes	$	1,626	$	1,623	$	3

Liabilities
Accrued expenses	$	3,450	$	3,225	$	225
Customer advances	$	1,378	$	1,274	$	104

Shareholders' equity
Profit employed in the business	$	28,657	$	28,673	$	(16	)

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 guidance was effective January 1, 2018, and was applied on a modified retrospective basis through a cumulative effect adjustment to retained earnings as of January 1, 2018. The adoption did not have a material impact on our financial statements.

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 substantially 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. Entities have the option to adopt the new guidance using a modified retrospective approach through a cumulative effect adjustment to retained earnings applied either to the beginning of the earliest period presented or the beginning of the period of adoption. In addition, the new guidance provides for certain practical expedients. The new guidance is effective January 1, 2019, with early adoption permitted. A team is currently designing new processes and controls, implementing a software solution and evaluating our population of leased assets to assess the effect of the new guidance on our financial statements. We plan to adopt the new guidance effective January 1, 2019 using a modified retrospective approach through a cumulative effect adjustment to retained earnings as of the beginning of the period of adoption.

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 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 was 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 are now included in Cash provided by operating activities and will no longer be separately classified as a financing activity. This change was adopted retrospectively. The guidance was effective January 1, 2017, and did not 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 was effective January 1, 2018, and was applied on a retrospective basis. The adoption did not have a material impact on our financial statements.

Tax accounting for intra-entity asset transfers – In October 2016, the FASB issued accounting guidance that requires the recognition of tax expense from the sales of intra-entity assets in the seller's tax jurisdiction at the time of transfer. The new guidance does not apply to intra-entity transfers of inventory. Under previous guidance, the tax effects of these assets were deferred until the transferred asset was sold to a third party or otherwise recovered through use. The guidance was effective January 1, 2018, and was applied on a modified retrospective basis through a cumulative effect adjustment to retained earnings as of January 1, 2018. The adoption did not have a material impact on our financial statements.

Classification of restricted cash – In November 2016, the FASB issued accounting guidance related to the presentation and classification of changes in restricted cash on the statement of cash flows where diversity in practice exists. The guidance was effective January 1, 2018, and was applied on a retrospective basis. The adoption did not have a material impact on our financial statements.

Presentation of net periodic pension costs and net periodic postretirement benefit costs – In March 2017, the FASB issued accounting guidance that requires that an employer disaggregate the service cost component from the other components of net benefit cost. Service cost is required to be reported in the same line item or items as other compensation costs arising from services rendered by the pertinent employees during the period. The other components of net periodic benefit cost are required to be reported outside the subtotal for income from operations. Additionally, only the service cost component of net benefit costs is eligible for capitalization. The guidance was effective January 1, 2018. We applied the presentation changes retrospectively and the capitalization change prospectively. The adoption primarily resulted in the reclassification of other components of net periodic benefit cost outside of Operating profit in the Consolidated Statement of Results of Operations.



Consolidated Statement of Results of Operations

	Three Months Ended June 30, 2017
(Millions of dollars)	As Revised		Previously Reported		Effect of Change
Cost of goods sold	$	7,816	$	7,769	$	47
Selling, general and administrative expenses	$	1,304	$	1,289	$	15
Research and development expenses	$	458	$	453	$	5
Total operating costs	$	10,147	$	10,080	$	67
Operating profit	$	1,184	$	1,251	$	(67	)
Other income (expense)	$	96	$	29	$	67

	Six Months Ended June 30, 2017
	As Revised		Previously Reported		Effect of Change
Cost of goods sold	$	14,617	$	14,527	$	90
Selling, general and administrative expenses	$	2,365	$	2,334	$	31
Research and development expenses	$	883	$	871	$	12
Other operating (income) expenses	$	1,403	$	1,432	$	(29	)
Total operating costs	$	19,589	$	19,485	$	104
Operating profit	$	1,564	$	1,668	$	(104	)
Other income (expense)	$	128	$	24	$	104

Premium amortization on purchased callable debt securities – In March 2017, the FASB issued accounting guidance related to the amortization period for certain purchased callable debt securities held at a premium. Securities held at a premium will be required to be amortized to the earliest call date rather than the maturity date. The new standard is required to be applied with a modified retrospective approach through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. The guidance is effective January 1, 2019, with early adoption permitted. We do not expect the adoption to have a material impact on our financial statements.

Clarification on stock-based compensation – In May 2017, the FASB issued accounting guidance to clarify which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting. The guidance was effective January 1, 2018, and was applied prospectively. The adoption did not have a material impact on our financial statements.

Derivatives and hedging – In August 2017, the FASB issued accounting guidance to better align hedge accounting with a company’s risk management activities, simplify the application of hedge accounting and improve the disclosures of hedging arrangements. The new guidance 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. The guidance is effective January 1, 2019, with early adoption permitted. The impact on our financial statements at the time of adoption will primarily be reclassification of our gains (losses) for designated ME&T foreign exchange contracts from Other income (expense) to components of Operating profit in the Consolidated Statement of Results of Operations. We plan to adopt the new guidance effective January 1, 2019.

Reclassification of certain tax effects from accumulated other comprehensive income – In February 2018, the FASB issued accounting guidance to allow a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from U.S. tax reform legislation. The new guidance is required to be applied either in the period of adoption or retrospectively to each period affected by U.S. tax reform legislation. The guidance is effective January 1, 2019, with early adoption permitted. We are in the process of evaluating the effect of the new guidance on our financial statements.