Recent Accounting Pronouncements

12 Months Ended

Dec. 31, 2018

Accounting Changes and Error Corrections [Abstract]

RECENT ACCOUNTING PRONOUNCEMENTS

The Company considers the applicability and impact of all accounting standard updates (ASUs). ASUs not listed below were assessed and determined to be either not applicable or are expected to have minimal impact on our consolidated financial position or results of operations.

Recently Adopted Accounting Pronouncements

In May 2014, the FASB issued ASU 2014-09 amending the existing accounting standards for revenue recognition. The new standard was effective for ITT as of January 1, 2018. Most revenue streams are recorded consistently under both the new standard and the previous standard. However, the timing of revenue recognition of certain design and build contracts in our Industrial Process segment, recognized using the percentage of completion method under the previous standard, is now dependent on certain terms within the contract and therefore will vary based on the new guidance. ITT adopted this guidance using a modified retrospective approach. As of the date of adoption, we had recognized $49 of revenue and $5 of operating income on open contracts in our Industrial Process segment using the percentage of completion method that are recognized at a point in time under the new guidance, resulting in a cumulative adjustment to the opening balance in retained earnings of $4, net of tax. The comparative information has not been restated and continues to be reported under the accounting guidance in effect in those periods. Additionally, the new guidance resulted in a change in balance sheet presentation. Certain progress payments, previously presented as a reduction of inventory, are now presented within accrued liabilities. Unbilled receivables, previously presented within receivables, net, are now presented within other current or non-current assets.

The cumulative effect of the changes made to our consolidated January 1, 2018 balance sheet related to the adoption of ASU 2014-09 is as follows:



	Balance as of December 31, 2017			Cumulative Effect of Adjustments				Balance as of January 1, 2018
Assets:
Receivables, net		$	629.6		$	(71.9	)		$	557.7
Inventories, net		311.9			66.3				378.2
Other current assets		147.4			43.2				190.6
Deferred income taxes		149.9			1.0				150.9
Liabilities:
Accrued liabilities		384.4			43.7				428.1
Other non-current liabilities		175.6			(1.0		)		174.6
Equity:
Retained earnings		1,856.1			(4.1		)		1,852.0

The impacts to our Consolidated Statements of Operations during 2018, and our Consolidated Balance Sheet as of December 31, 2018 had we not adopted ASU 2014-09 are as follows:



As of or for the Periods Ended December 31, 2018	As Reported		Amounts under previous standard			Effect of Change
Statement of Operations
Revenue	$	2,745.1		$	2,734.2	$	(10.9	)
Costs of revenue	1,857.9			1,848.5		(9.4		)
Income tax expense	57.7			57.3		(0.4		)
Net income	334.6			333.5		(1.1		)

Balance Sheets
Assets:
Receivables, net	540.0			580.5		40.5
Inventories, net	380.5			322.0		(58.5		)
Other current assets	163.4			141.6		(21.8		)
Deferred income taxes	164.5			163.8		(0.7		)
Liabilities:
Accrued liabilities	416.7			372.2		(44.5		)
Other non-current liabilities	166.5			167.5		1.0
Equity:
Retained earnings	2,110.3			2,113.3		3.0

In March 2017, the FASB issued ASU 2017-07 which amends the Statement of Operations presentation for the components of net periodic benefit cost for entities that sponsor defined benefit pension and other postretirement plans. Under the ASU, entities are required to disaggregate the service cost component and present it with other current compensation costs for the related employees. All other components of net periodic benefit cost are no longer classified as an operating expense. In addition, only the service cost component will be eligible for capitalization on the balance sheet. The ASU requires a retrospective transition method to adopt the requirement to present service costs separately from the other components of net periodic benefit cost in the statements of operations, and a prospective transition method to adopt the requirement that prohibits capitalization of all components of net periodic benefit cost on the balance sheet except service costs. ITT adopted the ASU beginning in the first quarter of 2018.

As a result of the adoption, our Consolidated Statement of Operations for 2017 and 2016 was restated as follows:



For the Year Ended December 31, 2017	Previously Reported			Effect of Change				Restated
Costs of revenue		$	1,768.1		$	(2.7	)		$	1,765.4
General and administrative expenses^(a)		264.9			(6.5		)		258.4
Sales and marketing expenses		169.7			(0.2		)		169.5
Research and development expenses		93.7			(0.2		)		93.5
Operating income		309.7			9.6				319.3
Interest and non-operating expenses, net		0.3			9.6				9.9

For the Year Ended December 31, 2016	Previously Reported			Effect of Change				Restated
Costs of revenue		$	1,647.2		$	(2.7	)		$	1,644.5
General and administrative expenses^(a)		275.0			(14.5		)		260.5
Sales and marketing expenses		170.0			(0.2		)		169.8
Research and development expenses		80.8			(0.3		)		80.5
Operating income		258.9			17.7				276.6
Interest and non-operating expenses, net		0.5			17.7				18.2


(a)	Previously reported General and administrative expenses of $0.9 have been reclassed to conform with current year presentation for the years ended December 31, 2017 and 2016, respectively, related to gains on the sale of long-lived assets.

In November 2016, the FASB issued ASU 2016-18 which requires restricted cash to be included with cash and cash equivalents when reconciling the beginning and ending amounts on the Statement of Cash Flows. In addition, when cash and restricted cash are presented on separate lines on the Balance Sheet, an entity is required to reconcile the total cash, cash equivalents and restricted cash in the Statement of Cash Flows to the related line items in the Balance Sheet. The ASU requires a retrospective transition method and ITT adopted the ASU beginning in the first quarter of 2018.

In March 2016, the FASB issued ASU 2016-09 to simplify several aspects of the accounting standard for employee share-based payment transactions, including the classification of excess tax benefits and deficiencies and the accounting for employee forfeitures. ITT elected to adopt this guidance as of January 1, 2017 which includes the following:

•

Excess tax benefits and deficiencies are no longer recognized as a change in additional paid-in-capital in the equity section of the Balance Sheet. Instead they are recognized on the Statements of Operations as a tax expense or benefit. On the Statement of Cash Flows, excess tax benefits and deficiencies are no longer classified as a financing activity. Instead they are classified as an operating activity. These provisions were adopted using a prospective method of transition. During 2018 and 2017, we recorded an income tax benefit of $2.2 and $2.7, respectively, on the Statement of Operations and classified this benefit on the Statement of Cash Flows as an operating activity. The excess tax benefit of $3.2 for 2016 was recorded as a change in equity on the Balance Sheet and was classified as a financing activity on the Statement of Cash Flows.

Previously unrecognized tax benefits due to net operating loss carryforwards were recognized during the first quarter of 2017 using a modified retrospective approach, resulting in a cumulative-effect adjustment to increase retained earnings by $2.1 as of January 1, 2017. In addition, a corresponding deferred tax asset of $25.6 was partially offset by a valuation allowance of $23.5 during the first quarter of 2017 as the newly recognized net operating losses were not considered more likely than not realizable.


•	The impact of forfeitures are now recognized as they occur as opposed to previously estimating future employee forfeitures. We adopted this provision utilizing a modified retrospective approach, resulting in a cumulative-effect adjustment reducing retained earnings by $1.1, net of tax, as of January 1, 2017.


•	The ASU also provides new guidance in other areas including minimum statutory tax withholding rules and the calculation of diluted common shares outstanding. The adoption of these provisions were reflected prospectively in the financial statements and did not have a material impact.

Accounting Pronouncements Not Yet Adopted

In February 2016, the FASB issued ASU 2016-02, impacting the accounting for leases, intending to increase transparency and comparability of organizations by requiring balance sheet presentation of leased assets and increased financial statement disclosure of leasing arrangements. The revised standard will require entities to recognize a liability for their lease obligations and a corresponding asset representing the right to use the underlying asset over the lease term. Lease obligations are to be measured at the present value of lease payments and accounted for using the effective interest method. The accounting for the leased asset will differ slightly depending on whether the agreement is deemed to be a financing or operating lease. For finance leases, the leased asset is depreciated on a straight-line basis and recorded separately from the interest expense in the Statements of Operations, resulting in higher expense in the earlier part of the lease term. For operating leases, the depreciation and interest expense components are combined, recognized evenly over the term of the lease, and presented as a reduction to operating income. The ASU requires that assets and liabilities be presented or disclosed separately and classified appropriately as current and noncurrent. The ASU further requires additional disclosure of certain qualitative and quantitative information related to lease agreements. The ASU is effective for the Company beginning in the first quarter 2019. Upon adoption on January 1, 2019, we expect the right-of-use asset and corresponding lease liability to approximate $85. However, the Company does not expect the adoption to have a material impact to its Consolidated Statements of Operations or Consolidated Statements of Cash Flows.