Note A — Significant Accounting Policies and Recent Accounting Standards

Basis of Presentation

The accompanying Condensed Consolidated Financial Statements (Unaudited) include the accounts of Harris Corporation and its consolidated subsidiaries. As used in these Notes to Condensed Consolidated Financial Statements (Unaudited) (these “Notes”), the terms “Harris,” “Company,” “we,” “our” and “us” refer to Harris Corporation and its consolidated subsidiaries. Intracompany transactions and accounts have been eliminated in consolidation. The accompanying Condensed Consolidated Financial Statements (Unaudited) have been prepared by Harris, without an audit, in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and with the rules and regulations of the Securities and Exchange Commission (“SEC”). Accordingly, such interim financial statements do not include all information and footnotes necessary for a complete presentation of financial condition, results of operations, cash flows and equity in conformity with GAAP for annual financial statements. In the opinion of management, such interim financial statements reflect all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation of our financial condition, results of operations and cash flows for the periods presented therein. The results for the quarter and two quarters ended December 28, 2018 are not necessarily indicative of the results that may be expected for the full fiscal year or any subsequent period. The balance sheet at June 29, 2018 has been derived from our audited financial statements, but does not include all of the information and footnotes required by GAAP for annual financial statements. We provide complete, audited financial statements in our Annual Report on Form 10-K, which includes information and footnotes required by the rules and regulations of the SEC. The information included in this Quarterly Report on Form 10-Q (this “Report”) should be read in conjunction with the Management’s Discussion and Analysis of Financial Condition and Results of Operations and the Consolidated Financial Statements and accompanying Notes to Consolidated Financial Statements included in our Annual Report on Form 10-K for the fiscal year ended June 29, 2018 (our “Fiscal 2018 Form 10-K”) and in our Current Report on Form 8-K filed with the SEC on December 13, 2018 (our “Fiscal 2017-2018 Update 8-K”), which updated and superseded historical fiscal 2018 and fiscal 2017 financial information contained in Item 7, Item 8 and certain other Items in our Fiscal 2018 Form 10-K to reflect the impact for those two fiscal years of retrospective application of Accounting Standards Update (“ASU”) 2014-09, Accounting Standards Codification (“ASC”) 606, Revenue from Contracts with Customers (Topic 606), as amended (“ASC 606”), and ASU 2017-07, Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost (“ASU 2017-07”), each of which we adopted effective June 30, 2018. See “Adoption of New Accounting Standards” below in this Note A for additional information.

Amounts contained in this Report may not always add to totals due to rounding.

Reclassifications

The classification of certain prior-period amounts has been adjusted in our Condensed Consolidated Financial Statements (Unaudited) to conform with current-period classifications. Reclassifications include certain direct selling and bid and proposal costs from the “Cost of product sales and services” line item to the “Engineering, selling and administrative expenses” line item in our Condensed Consolidated Statement of Income (Unaudited) and in these Notes.

Use of Estimates

The preparation of financial statements in accordance with GAAP requires us to make estimates and assumptions that affect the amounts reported in the accompanying Condensed Consolidated Financial Statements (Unaudited) and these Notes and related disclosures. These estimates and assumptions are based on experience and other information available prior to issuance of the accompanying Condensed Consolidated Financial Statements (Unaudited) and these Notes. Materially different results can occur as circumstances change and additional information becomes known.

Adoption of New Accounting Standards

As discussed above, we adopted ASC 606 effective June 30, 2018. This standard supersedes nearly all revenue recognition guidance under GAAP and International Financial Reporting Standards and supersedes some cost guidance for construction-type and production-type contracts. The guidance in this standard is principles-based, and, consequently, entities are required to use more judgment and make more estimates than under prior guidance, including identifying contract performance obligations, estimating variable consideration to include in the contract price and allocating the transaction price to separate performance obligations. The core principle of this standard is that entities should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services. To help financial statement users better understand the nature, amount, timing and potential uncertainty of the revenue and cash flows, this standard requires significantly more interim and annual disclosures.

We adopted the requirements of the new standard using the full retrospective transition method. We opted for this transition method because we believe it provides enhanced comparability and transparency across periods. We elected to apply the practical expedient related to backlog disclosures for prior reporting periods and the practical expedient related to evaluating the effects of contract modifications that occurred prior to the earliest period presented. No other transition practical expedients were applied. Retrospective application of this standard resulted in the recognition of a cumulative-effect adjustment of $15 million to reduce the opening balance of retained earnings at July 2, 2016.

This standard also resulted in the establishment of “Contract assets” and “Contract liabilities” line items and the reclassification to these line items of amounts previously presented in the “Receivables,” “Inventories” and “Advance payments and unearned income” line items in our Condensed Consolidated Balance Sheet. See Note 2: “Accounting Changes or Recent Accounting Pronouncements” in our Notes to Consolidated Financial Statements in our Fiscal 2017-2018 Update 8-K for a table summarizing the effect of adopting ASC 606 on our previously reported Consolidated Balance Sheet as of June 29, 2018. Total net cash provided by operating activities and total net cash provided by or used in investing activities and financing activities in our previously reported Condensed Consolidated Statements of Cash Flows (Unaudited) were not impacted by our adoption of ASC 606.

We also adopted ASU 2017-07 effective June 30, 2018, as discussed above. This update requires that entities present components of net periodic pension and postretirement benefit costs other than the service cost component (“non-service cost amounts”) separately from the service cost component. We adopted this update retrospectively by recasting each prior period presented, using as our estimation basis for recasting prior periods the amounts disclosed in Note 13: “Pension and Other Postretirement Benefits” in our Notes to Consolidated Financial Statements in our Fiscal 2018 Form 10-K. Retrospective application of this update resulted in reclassification to the “Non-operating income” line item of non-service cost amounts that were included in the “Cost of product sales and services” and “Engineering, selling and administrative expenses” line items in our Condensed Consolidated Statement of Income (Unaudited) prior to adopting ASU 2017-07.

The following table summarizes the effect of adopting ASC 606 and ASU 2017-07 on our previously reported Condensed Consolidated Statement of Income (Unaudited) for the quarter and two quarters ended December 29, 2017:



	Quarter Ended December 29, 2017
	Previously Reported			Effect of Adopting ASC 606			Effect of Adopting ASU 2017-07			Currently Reported

	(In millions, except per share amounts)
Revenue from product sales and services	$	1,535		$	—		$	—		$	1,535
Cost of product sales and services	(987		)	1			(36		)	(1,022		)
Engineering, selling and administrative expenses	(276		)	(5		)	(10		)	(291		)
Non-operating income (loss)	(2		)	—			46			44
Interest income	1			—			—			1
Interest expense	(42		)	—			—			(42		)
Income from continuing operations before income taxes	229			(4		)	—			225
Income taxes	(90		)	(4		)	—			(94		)
Income from continuing operations	139			(8		)	—			131
Discontinued operations, net of income taxes	—			—			—			—
Net income	$	139		$	(8	)	$	—		$	131

Net income per common share
Basic
Continuing operations	$	1.17		$	(0.07	)	$	—		$	1.10
Discontinued operations	—			—			—			—
	$	1.17		$	(0.07	)	$	—		$	1.10
Diluted
Continuing operations	$	1.15		$	(0.07	)	$	—		$	1.08
Discontinued operations	—			—			—			—
	$	1.15		$	(0.07	)	$	—		$	1.08



	Two Quarters Ended December 29, 2017
	Previously Reported			Effect of Adopting ASC 606			Effect of Adopting ASU 2017-07			Currently Reported

	(In millions, except per share amounts)
Revenue from product sales and services	$	2,948		$	(3	)	$	—		$	2,945
Cost of product sales and services	(1,872		)	4			(73		)	(1,941		)
Engineering, selling and administrative expenses	(532		)	(8		)	(19		)	(559		)
Non-operating income (loss)	(2		)	—			92			90
Interest income	1			—			—			1
Interest expense	(83		)	—			—			(83		)
Income from continuing operations before income taxes	460			(7		)	—			453
Income taxes	(154		)	(3		)	—			(157		)
Income from continuing operations	306			(10		)	—			296
Discontinued operations, net of income taxes	(6		)	—			—			(6		)
Net income	$	300		$	(10	)	$	—		$	290

Net income per common share
Basic
Continuing operations	$	2.57		$	(0.08	)	$	—		$	2.49
Discontinued operations	(0.05		)	(0.01		)	—			(0.06		)
	$	2.52		$	(0.09	)	$	—		$	2.43
Diluted
Continuing operations	$	2.52		$	(0.08	)	$	—		$	2.44
Discontinued operations	(0.05		)	—			—			(0.05		)
	$	2.47		$	(0.08	)	$	—		$	2.39

The following table presents the effect of adopting ASC 606 on our previously reported Condensed Consolidated Statement of Cash Flows (Unaudited) for the two quarters ended December 29, 2017:



	Two Quarters Ended December 29, 2017
	Previously Reported			Effect of Adopting ASC 606			Currently Reported

	(In millions, except shares)
Net income	$	300		$	(10	)	$	290
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization of acquisition-related intangibles⁽¹⁾	58			—			58
Depreciation and other amortization⁽¹⁾	72			—			72
Share-based compensation	24			—			24
Pension income	(68		)	—			(68		)
(Increase) decrease in:
Accounts receivable	(19		)	5			(14		)
Contract assets	—			(84		)	(84		)
Inventories	(102		)	79			(23		)
Increase (decrease) in:
Accounts payable	(78		)	—			(78		)
Advance payments and unearned income	38			(38		)	—
Contract liabilities	—			47			47
Income taxes	213			3			216
Other	(65		)	(2		)	(67		)
Net cash provided by operating activities	$	373		$	—		$	373

_______________


(1)	“Amortization of acquisition-related intangibles” includes amortization of non-Exelis Inc. acquisition-related intangibles, which was previously included in the “Depreciation and amortization” line item in our Condensed Consolidated Statement of Cash Flows (Unaudited) in our Form 10-Q for the quarter ended December 29, 2017.

Accounting Standards Issued But Not Yet Effective

In February 2016, the Financial Accounting Standards Board issued a new lease standard that supersedes existing lease guidance under GAAP. This standard requires, among other things, the recognition of right-of-use assets and liabilities on the balance sheet for most lease arrangements and disclosure of certain information about leasing arrangements. This standard currently allows two transition methods with certain practical expedients available. Companies may elect to use the modified retrospective approach for leases that exist or are entered into after the beginning of the earliest comparative period in the financial statements or to initially apply this standard at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. This standard is effective for fiscal years, and interim reporting periods within those years, beginning after December 15, 2018, which for us is our fiscal 2020.

We have developed a project plan to evaluate the impact of this standard and design and implement future processes, tools and controls. The majority of our current lease arrangements are classified as operating leases under existing GAAP lease guidance, and we expect they will continue to be classified as operating leases under the new standard. Although we are continuing to evaluate the impact to our consolidated balance sheet of recognizing right-of-use assets and lease liabilities for the majority of our current lease obligations, which could be material, we do not expect this standard to have a material impact on our results of operations or cash flows. We have not yet made a decision on the transition method, as this determination is primarily dependent on the completion of our evaluation.