SUMMARY OF SIGNIFICANT ACCOUNTING POLICES

The Consolidated Financial Statements include the accounts of Checkpoint Systems, Inc. and its majority-owned subsidiaries (collectively, the “Company”). All inter-company transactions are eliminated in consolidation. The Consolidated Financial Statements and related notes are unaudited and do not contain all disclosures required by generally accepted accounting principles in annual financial statements. The Consolidated Balance Sheet as of December 27, 2015 is derived from the Company's audited Consolidated Financial Statements at December 27, 2015. Refer to our Annual Report on Form 10-K for the fiscal year ended December 27, 2015 for the most recent disclosure of our accounting policies.

The Consolidated Financial Statements include all adjustments, consisting of normal recurring adjustments, necessary to state fairly our financial position at March 27, 2016 and December 27, 2015 and our results of operations for thirteen weeks ended March 27, 2016 and March 29, 2015 and changes in cash flows for the thirteen weeks ended March 27, 2016 and March 29, 2015. The results of operations for the interim period should not be considered indicative of results to be expected for the full year.

Out of Period Adjustments

In the period ended March 29, 2015, we recorded an out of period adjustment to the valuation allowance of a non "U.S." entity with a deferred tax liability related to an indefinite lived intangible pertaining to the third quarter ended September 28, 2014. The total impact of the adjustment on the first quarter of 2015 and year-to-date periods within 2015 is a reduction in income tax expense of $1.0 million and a reduction in net loss of $1.0 million. This adjustment was not material to any previously issued interim or annual financial statements or to the 2015 interim or annual consolidated financial statements.

In the period ended March 27, 2016, we recorded out of period adjustments to decrease a rebate accrual of $0.2 million and to increase an employee service accrual by $0.2 million. The total impact of the adjustments on the first quarter of 2016 and year-to-date periods within 2016 is an increase in revenues of $0.2 million, an increase in selling, general and administrative expenses of $0.2 million and a reduction in net loss of $0.1 million. The adjustment was not material to any previously issued interim or annual financial statements or to the 2016 interim or annual consolidated financial statements.

Customer Rebates

We record estimated reductions to revenue for customer incentive offerings, including volume-based incentives and rebates. The accrual for these incentives and rebates, which is included in the Other Accrued Expenses section of our Consolidated Balance Sheets, was $12.5 million and $10.5 million as of March 27, 2016 and December 27, 2015, respectively. We record revenues net of an allowance for estimated return activities. Return activity was immaterial to revenue and results of operations for all periods presented.

Warranty Reserves

We provide product warranties for our various products. These warranties vary in length depending on product and geographical region. We establish our warranty reserves based on historical data of warranty transactions.

The following table sets forth the movement in the warranty reserve which is located in the Other Accrued Expenses section of our Consolidated Balance Sheets:



(amounts in thousands)
Three months ended	March 27, 2016			March 29, 2015
Balance at beginning of year	$	3,410		$	4,379
Accruals for warranties issued, net	836			597
Settlements made	(744		)	(887		)
Foreign currency translation adjustment	43			(200		)
Balance at end of period	$	3,545		$	3,889

Accumulated Other Comprehensive Income (Loss)

The components of accumulated other comprehensive income (loss), net of tax, for the three months ended March 27, 2016 were as follows:



(amounts in thousands)	Pension plan			Other postretirement benefit plan			Changes in realized and unrealized gains (losses) on derivative hedges			Foreign currency translation adjustment			Total accumulated other comprehensive income (loss)
Balance, December 27, 2015	$	(18,232	)	$	(1,014	)	$	(125	)	$	(20,856	)	$	(40,227	)
Other comprehensive income (loss) before reclassification	(337		)	—			(311		)	2,192			1,544
Amounts reclassified from other comprehensive income	316			28			—			—			344
Net other comprehensive income (loss)	(21		)	28			(311		)	2,192			1,888
Balance, March 27, 2016	$	(18,253	)	$	(986	)	$	(436	)	$	(18,664	)	$	(38,339	)

The significant items reclassified from each component of other comprehensive income (loss) for the three months ended March 27, 2016 and March 29, 2015 were as follows:



(amounts in thousands)	March 27, 2016				March 29, 2015
Details about accumulated other comprehensive income (loss) components	Amount reclassified from accumulated other comprehensive income (loss)			Affected line item in the statement where net loss is presented	Amount reclassified from accumulated other comprehensive income (loss)			Affected line item in the statement where net loss is presented
Amortization of pension plan items
Actuarial loss ⁽¹⁾	$	(439	)		$	(750	)
Prior service cost ⁽¹⁾	(10		)		(6		)
	(449		)	Total before tax	(756		)	Total before tax
	133			Tax benefit	3			Tax benefit
	$	(316	)	Net of tax	$	(753	)	Net of tax

Amortization of other postretirement benefit plan
Actuarial loss	$	(28	)		$	—
	(28		)	Total before tax	—			Total before tax
	—			Tax expense	—			Tax expense
	$	(28	)	Net of tax	$	—		Net of tax
Total reclassifications for the period	$	(344	)		$	(753	)


⁽¹⁾	These accumulated other comprehensive income components are included in the computation of net periodic pension costs. Refer to Note 10 of the Consolidated Financial Statements.

Dividend

On March 5, 2015, we declared a special dividend (the Dividend) of $0.50 per outstanding common share for all shareholders of record as of March 20, 2015. This Dividend reflects our commitment to building shareholder value through the execution of our strategic plan and a disciplined approach to capital allocation. After the Dividend, we believe we have the appropriate level of liquidity both to fund our internal initiatives and act on any strategic opportunities.

The cash dividend of $21.0 million was paid to common shareholders on April 10, 2015. Dividend distributions to shareholders are recognized as a liability in the period in which the dividend is formally approved by our Board of Directors and communicated to shareholders. The Dividend was recorded as a reduction of additional capital in Stockholders' Equity.

The Dividend did not provide any cash payment or benefit to stock options, restricted stock units, or performance shares, and instead only applied to the outstanding common stock and as outlined in the executive and director deferred compensation plans. The non-cash portion of the Dividend of $0.4 million was credited to the executive and director deferred compensation plan deferred stock accounts on April 10, 2015 in accordance with the plans.

Share Repurchase Program

In July 2015, our Board of Directors approved a stock repurchase program that authorized the repurchase of up to $30 million of our common stock to be funded using our available cash. We are authorized to repurchase from time to time shares of our outstanding common stock on the open market or in privately negotiated transactions. The timing and amount of stock repurchases, and the prices at which such purchases may be made, will depend on a variety of factors, including the market conditions as well as corporate and regulatory considerations. The share repurchase program may be suspended, modified or discontinued at any time and we have no obligation to repurchase any amount of our common stock under the program. The Merger Agreement restricts our ability to repurchase our common stock. Common stock obtained by us through the repurchase program has been added to our treasury stock holdings. There were no shares repurchased during the first fiscal quarter of 2016.

Subsequent Events

We perform a review of subsequent events in connection with the preparation of our financial statements. The accounting for and disclosure of events that occur after the balance sheet date, but before our financial statements are issued, are reflected where appropriate or required in our financial statements.

Recently Adopted Accounting Standards

In June 2014, the FASB issued “Compensation-Stock Compensation (Topic 718): Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period” (ASU 2014-12). The amendments in this update require that a performance target that affects vesting, and that could be achieved after the requisite service period, be treated as a performance condition. As such, the performance target should not be reflected in estimating the grant date fair value of the award. This update further clarifies that compensation cost should be recognized in the period in which it becomes probable that the performance target will be achieved and should represent the compensation cost attributable to the period(s) for which the requisite service has already been rendered. ASU 2014-12 is effective for annual periods and interim periods beginning after December 15, 2015, which for us was December 28, 2015, the first day of our 2016 fiscal year. We elected to apply this guidance prospectively to all awards granted or modified after the effective date. The adoption of this standard has not had a material effect on our consolidated results of operations and financial condition.

In January 2015, the FASB issued “Income Statement-Extraordinary and Unusual Items (Subtopic 225-20): Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items” (ASU 2015-01). The amendments in this update eliminate from GAAP the concept of extraordinary items. Although the amendments will eliminate the requirements in Subtopic 225-20 for reporting entities to consider whether an underlying event or transaction is extraordinary, the presentation and disclosure guidance for items that are unusual in nature or occur infrequently will be retained and will be expanded to include items that are both unusual in nature and infrequently occurring. ASU 2015-01 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2015, which for us was December 28, 2015, the first day of our 2016 fiscal year. The adoption of this standard has not had a material effect on our consolidated results of operations and financial condition.

In February 2015, the FASB issued “Consolidation (Topic 810): Amendments to the Consolidation Analysis” (ASU 2015-02). The amendments in this update modifies existing consolidation guidance related to (i) limited partnerships and similar legal entities, (ii) the evaluation of variable interests for fees paid to decision makers or service providers, (iii) the effect of fee arrangements and related parties on the primary beneficiary determination, and (iv) certain investment funds. These changes reduce the number of consolidation models from four to two and place more emphasis on the risk of loss when determining a controlling financial interest. ASU 2015-02 is effective for public companies for fiscal years beginning after December 15, 2015, which for us was December 28, 2015, the first day of our 2016 fiscal year. The adoption of this standard has not had a material effect on our consolidated results of operations and financial condition.

In April 2015, the FASB issued “Compensation-Retirement Benefits (Topic 715): Practical Expedient for the Measurement Date of an Employer’s Defined Benefit Obligation and Plan Assets” (ASU 2015-04). The amendments in this update provide a practical expedient for employers with fiscal year-ends that do not fall on a month-end by permitting those employers to measure defined benefit plan assets and obligations as of the month-end that is closest to the entity's fiscal year-end. ASU 2015-04 is effective for public business entities for fiscal years, and interim periods within those years, beginning after December 15, 2015, which for us was December 28, 2015, the first day of our 2016 fiscal year. The adoption of this standard has not had a material effect on our consolidated results of operations and financial condition.

In April 2015, the FASB issued “Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement” (ASU 2015-05). The amendments in this update help entities evaluate the accounting for fees paid by a customer in a cloud computing arrangement by providing guidance as to whether an arrangement includes the sale or license of software. ASU 2015-05 is effective for public business entities for fiscal years, and interim periods within those years, beginning after December 15, 2015, which for us was December 28, 2015, the first day of our 2016 fiscal year. The adoption of this standard has not had a material effect on our consolidated results of operations and financial condition.

In June 2015, the FASB issued “Technical Corrections and Improvements” (ASU 2015-10). The amendments in this update provide technical corrections and improvements to a wide range of Topics in the Accounting Standards Codification (the Codification). The purpose of these amendments is to correct unintended differences between original guidance and the Codification, to provide clarification through updating wording or correcting references, to streamline or simplify the Codification through minor changes, and to make other minor improvements to the guidance which are not expected to have a significant effect on current accounting practice. ASU 2015-10 is effective for fiscal and interim periods beginning on or after December 15, 2015, which for us was December 28, 2015, the first day of our 2016 fiscal year. The adoption of this standard has not had a material effect on our consolidated results of operations and financial condition.

In September 2015, the FASB issued “Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments” (ASU 2015-16). The amendments in this update require that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. The acquirer must also record, in the same period’s financial statements, the effect on earnings of changes in depreciation, amortization, or other income effects, if any, as a result of the change to the provisional amounts, calculated as if the accounting had been completed at the acquisition date. The update also requires an entity to present separately on the face of the income statement or disclose in the notes the portion of the amount recorded in current-period earnings by line item that would have been recorded in previous reporting periods if the adjustment to the provisional amounts had been recognized as of the acquisition date. ASU 2015-16 is effective for fiscal years and interim periods beginning on or after December 15, 2015, which for us was December 28, 2015, the first day of our 2016 fiscal year. The new guidance will be applied prospectively to adjustments to provisional amounts that occur after the effective date with earlier application permitted for financial statements that have not yet been made available for issuance. We do not have any business combination for which the accounting is incomplete. The adoption of this standard has not had a material effect on our consolidated results of operations and financial condition.

New Accounting Pronouncements and Other Standards

In May 2014, the FASB issued ASU 2014-09 “Revenue from Contracts with Customers (Topic 606)” (ASU 2014-09), which creates a new Topic, Accounting Standards Codification Topic 606. The standard is principle-based and provides a five-step model to determine when and how revenue is recognized. The core principle of ASU 2014-09 is that an entity 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 or services. In July 2015, the FASB approved the deferral of the effective date by one year. The accounting standard is now effective for annual and interim periods beginning after December 15, 2017, which for us is January 1, 2018, the first day of our 2018 fiscal year. The final ASU permits organizations to adopt the new revenue standard early, but not before annual and interim periods beginning after December 15, 2016. We are currently evaluating the impact of adopting this guidance.

In August 2014, the FASB issued “Presentation of Financial Statements-Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern” (ASU 2014-15). Continuation of a reporting entity as a going concern is presumed as the basis for preparing financial statements unless and until the entity’s liquidation becomes imminent. Preparation of financial statements under this presumption is commonly referred to as the going concern basis of accounting. If and when an entity’s liquidation becomes imminent, financial statements should be prepared under the liquidation basis of accounting in accordance with Subtopic 205-30, “Presentation of Financial Statements-Liquidation Basis of Accounting.” Even when an entity’s liquidation is not imminent, there may be conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern. In those situations, financial statements should continue to be prepared under the going concern basis of accounting, but the new criteria in this update should be followed to determine whether to disclose information about the relevant conditions and events. ASU 2014-15 is effective for the annual period ending after December 15, 2016, and for annual periods and interim periods thereafter. Early application is permitted. We have not early adopted ASU 2014-15. The adoption of this standard is not expected to have a material effect on our consolidated results of operations and financial condition.

In April 2015, the FASB issued “Interest-Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs” (ASU 2015-03). The amendments in this update change the presentation of debt issuance costs in financial statements requiring an entity to present such costs in the balance sheet as a direct deduction from the related debt liability rather than as an asset. Amortization of the costs will continue to be reported as interest expense. ASU 2015-03 is effective for annual reporting periods beginning after December 15, 2016, which for us is December 26, 2016, the first day of our 2017 fiscal year. Early adoption is permitted. We have not early adopted ASU 2015-03. The new guidance will be applied retrospectively to each prior period presented. The adoption of this standard is not expected to have a material effect on our consolidated results of operations and financial condition.

In July 2015, the FASB issued “Inventory (Topic 330): Simplifying the Measurement of Inventory” (ASU 2015-11). The amendments in this update simplify the subsequent measurement of inventory by requiring inventory to be measured at the lower of cost and net realizable value. ASU 2015-11 is effective for fiscal and interim periods beginning on or after December 15, 2016, which for us is December 26, 2016, the first day of our 2017 fiscal year. Early application is permitted. We have not early adopted ASU 2015-11. The new guidance must be applied prospectively after the date of adoption. We are in the process of evaluating the adoption of this ASU, and do not expect this to have a material effect on our consolidated results of operations and financial condition.

In August 2015, the FASB issued “Interest-Imputation of Interest (Subtopic 835-30), Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements, Amendments to SEC Paragraphs Pursuant to Staff Announcement at June 18, 2015 EITF Meeting” (ASU 2015-15). The amendments to the SEC Paragraphs in this update state that given the absence of authoritative guidance within ASU 2015-03 for debt issuance costs related to line-of-credit arrangements, the SEC staff would not object to an entity deferring and presenting debt issuance costs as an asset and subsequently amortizing the deferred debt issuance costs ratably over the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings on the line-of-credit arrangement. The guidance in ASU 2015-15 is effective upon the adoption of ASU 2015-03, which for us is December 26, 2016, the first day of our 2017 fiscal year, and is not expected to have a material effect on our consolidated results of operations and financial condition.

In January 2016, the FASB issued “Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities” (ASU 2016-01). This update amends the guidance in U.S. GAAP on the classification and measurement of financial instruments. Changes to the current guidance primarily affect the accounting for equity investments, financial liabilities under the fair value option, and the presentation and disclosure requirements for financial instruments. In addition, the ASU clarifies guidance related to the valuation allowance assessment when recognizing deferred tax assets resulting from unrealized losses on available-for-sale debt securities. ASU 2016-01 is effective for fiscal years and interim periods beginning after December 15, 2017, which for us is January 1, 2018, the first day of our 2018 fiscal year. Upon adoption, an entity should apply the amendments by means of a cumulative-effect adjustment to the balance sheet at the beginning of the first reporting period in which the guidance is effective. Early adoption is not permitted except for the provision to record fair value changes for financial liabilities under the fair value option resulting from instrument-specific credit risk in other comprehensive income. We are currently evaluating the impact of adopting this guidance.

In February 2016, the FASB issued “Leases (Topic 842)” (ASU 2016-02). This update amends leasing accounting requirements. The most significant change will result in the recognition of lease assets and lease liabilities by lessees for those leases classified as operating leases under current guidance. The new guidance will also require significant additional disclosures about the amount, timing and uncertainty of cash flows from leases. ASU 2016-02 is effective for fiscal years and interim periods beginning after December 15, 2018, which for us is December 31, 2018, the first day of our 2019 fiscal year. Upon adoption, entities are required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach. Early adoption is permitted, and a number of optional practical expedients may be elected to simplify the impact of adoption. We have not early adopted ASU 2016-02. We are currently evaluating the impact of adopting this guidance. The overall impact is that assets and liabilities arising from leases are expected to increase based on the present value of remaining estimated lease payments at the time of adoption.

In February 2016, the FASB issued “Derivatives and Hedging (Topic 815)” (ASU 2016-05). The amendments in this guidance clarify that a change in the counterparty to a derivative instrument that has been designated as a hedging instrument under Topic 815 does not, in and of itself, require dedesignation of that hedging relationship provided that all other hedge accounting criteria continue to be met. ASU 2016-05 is effective for annual and interim periods beginning after December 15, 2016, which for us is December 26, 2016, the first day of our 2017 fiscal year, and is not expected to have a material effect on our consolidated results of operations and financial condition.

In March 2016, the FASB issued “Revenue from Contracts with Customers - Principal versus Agent Considerations (Reporting revenue gross versus net)” (ASU 2016-08), which clarifies gross versus net revenue reporting when another party is involved in the transaction. In April 2016, the FASB issued “Identifying Performance Obligations and Licensing” (ASU 2016-10) which amends the revenue guidance on identifying performance obligations and accounting for licenses of intellectual property. There are two transition methods available under the new standard, either cumulative effect or retrospective. The guidance in ASU 2016-08 and 2016-10 is effective upon the adoption of ASU 2014-09, which for us is January 1, 2018, the first day of our 2018 fiscal year. We are currently evaluating the impact of adopting this guidance.

In March 2016, the FASB issued “Compensation-Stock Compensation (Topic 718)” (ASU 2016-09) , which aims to simplify several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, classification of certain items on the statement of cash flows and accounting for forfeitures. The ASU is effective for annual and interim periods beginning after December 15, 2016, which for us is December 26, 2016, the first day of our 2017 fiscal year. Early application is permitted. We have not early adopted ASU 2016-09. We are currently evaluating the impact of adopting this guidance.