ACCOUNTING POLICIES

There were no material changes in accounting policies from those disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.

Foreign Currency Translation

For the Company’s international subsidiaries, the local currency is generally the functional currency. Assets and liabilities of these subsidiaries are translated into U.S. dollars using rates in effect at the balance sheet date while revenues and expenses are translated into U.S. dollars using average exchange rates. The cumulative translation adjustment resulting from changes in exchange rates are included in the Consolidated Balance Sheets as a component of accumulated other comprehensive income (loss) in total stockholders’ equity.

The Company’s accumulated other comprehensive loss is comprised of three main components: (i) currency translation; (ii) gains and losses associated with the Company’s defined benefit plan in the United Kingdom; and (iii) derivatives (in thousands):



	June 30, 2017			December 31, 2016
Currency translation adjustments⁽¹⁾	$	(38,598	)	$	(54,863	)
Derivative hedging activity	1,297			1,004
Pension activity	379			359
Total accumulated other comprehensive loss	$	(36,922	)	$	(53,500	)

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⁽¹⁾	Due to the weakening of the U.S. dollar, there was a substantial increase during the first six months of 2017, primarily the second quarter of 2017, with respect to certain functional currencies and their relation to the U.S. dollar, most notably the Canadian dollar, Australian dollar, British pound and euro.

Net foreign exchange transaction losses of $0.5 million and $0.5 million in the second quarters of 2017 and 2016, respectively, and $0.9 million and $1.6 million for the six months ended June 30, 2017 and 2016, respectively, are included in “Other expense” in the Consolidated Statements of Operations.

Investments in Variable Interest Entities

The Company evaluates all transactions and relationships with variable interest entities (“VIE”) to determine whether the Company is the primary beneficiary of the entities in accordance with FASB ASC 810, Consolidation.

The Company’s overall methodology for evaluating transactions and relationships under the VIE requirements includes the following two steps:


•	determine whether the entity meets the criteria to qualify as a VIE; and


•	determine whether the Company is the primary beneficiary of the VIE.

In performing the first step, the significant factors and judgments that the Company considers in making the determination as to whether an entity is a VIE include:


•	the design of the entity, including the nature of its risks and the purpose for which the entity was created, to determine the variability that the entity was designed to create and distribute to its interest holders;


•	the nature of the Company’s involvement with the entity;


•	whether control of the entity may be achieved through arrangements that do not involve voting equity;


•	whether there is sufficient equity investment at risk to finance the activities of the entity; and


•	whether parties other than the equity holders have the obligation to absorb expected losses or the right to receive residual returns.

If the Company identifies a VIE based on the above considerations, it then performs the second step and evaluates whether it is the primary beneficiary of the VIE by considering the following significant factors and judgments:


•	whether the entity has the power to direct the activities of a variable interest entity that most significantly impact the entity’s economic performance; and


•	whether the entity has the obligation to absorb losses of the entity that could potentially be significant to the variable interest entity or the right to receive benefits from the entity that could potentially be significant to the variable interest entity.

Based on its evaluation of the above factors and judgments, as of June 30, 2017, the Company consolidated any VIEs in which it was the primary beneficiary.

Financial data for consolidated variable interest entities are summarized in the following table (in thousands):



Balance sheet data ⁽¹⁾	June 30, 2017		December 31, 2016
Current assets	$	34,047	$	51,354
Non-current assets	24,447		25,607
Current liabilities	11,191		29,324
Non-current liabilities	23,365		28,849



	Six Months Ended June 30,
Income statement data ⁽¹⁾	2017		2016
Revenue	$	61,459	$	26,883
Gross profit	9,720		1,949
Net income (loss) attributable to Aegion Corporation	1,950		(3,098		)

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⁽¹⁾	During the first six months of 2017, changes were primarily driven from our joint venture in Louisiana, which continued its work on a large deepwater pipe coating and insulation project.

Newly Issued Accounting Pronouncements

In January 2017, the FASB issued guidance that simplifies the subsequent measurement of goodwill by removing the second step of the two-step impairment test. The standard requires an entity to perform its goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An impairment charge should be recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value. The standard was effective for the Company’s fiscal year beginning January 1, 2020, but early adoption is permitted for interim or annual goodwill impairment tests performed after January 1, 2017. The Company’s adoption of this standard, effective January 1, 2017, did not have a material impact on its consolidated financial statements.

In November 2016, the FASB issued guidance requiring that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and restricted cash. As a result, restricted cash will be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. This new guidance is effective for the Company’s fiscal year beginning January 1, 2018, including interim periods within that fiscal year. Early adoption is permitted, and the new guidance is to be applied retrospectively. The adoption of this standard is not expected to have a material impact on the Company’s consolidated financial statements, other than the classification of restricted cash on the consolidated statement of cash flows.

In August 2016, the FASB issued guidance to address diversity in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The standard is effective for the Company’s fiscal year beginning January 1, 2018, including interim periods within that fiscal year. Early adoption is permitted, and the new guidance is to be applied retrospectively. The Company is currently evaluating the effect the guidance will have on its statement of cash flows.

In March 2016, the FASB issued guidance that simplifies several aspects of the accounting for share-based payment awards to employees, including the accounting for income taxes, classification of awards as either equity or liabilities and classification in the statement of cash flows. The standard was effective for the Company’s fiscal year beginning January 1, 2017, including interim periods within the year. The Company’s adoption of this standard, effective January 1, 2017, did not have a material impact on its consolidated financial statements.

In February 2016, the FASB issued guidance that requires lessees to present right-of-use assets and lease liabilities on the balance sheet for all leases with lease terms longer than twelve months. The standard is effective for the Company’s fiscal year beginning January 1, 2019, including interim periods within that fiscal year. Early adoption is permitted. Entities are required to use the modified retrospective approach for all existing leases as of the effective date; however, the standard provides for certain practical expedients. The Company is currently evaluating the effect the guidance will have on its financial condition and results of operations, including an analysis of its current lease contracts as well as other existing arrangements to determine if they qualify for lease accounting under the new standard.

In November 2015, the FASB issued guidance that requires all deferred tax assets and liabilities, along with any related valuation allowance, to be presented as non-current within the Consolidated Balance Sheet. It was effective for the Company’s fiscal year beginning January 1, 2017, including interim periods within the year. The Company’s adoption of this standard, effective January 1, 2017, did not have a material impact on its consolidated financial statements. Prior period balances were not retrospectively adjusted.

In May 2014, the FASB issued guidance that supersedes revenue recognition requirements regarding contracts with customers to transfer goods or services or for the transfer of non-financial assets. Under the new guidance, entities are required to recognize revenue in order 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. The guidance provides a five-step analysis to be performed on transactions to determine when and how revenue is recognized. This new guidance is effective for the Company’s fiscal year beginning January 1, 2018. Early adoption is permitted, although the Company does not intend to do so. Entities are allowed to transition to the new standard either on a full retrospective basis or under the cumulative effect method whereby the entity applies the new revenue standard as of the date of initial application without restatement of comparative period amounts.

In early 2016, the Company identified a project manager as well as a cross-functional implementation team responsible for assessing the impact on its contracts. During the second quarter of 2017, the implementation team: (i) finalized the assessment phase, which included the identification of the Company’s key revenue streams (fixed fee, time and materials, product sales and royalty fees from license arrangements) and the comparison of historical accounting policies and practices to the requirements of the new revenue standard; (ii) finalized the contract review phase, which included identifying the population of contracts and a deep analysis of the new standard on individual contract terms; and (iii) made substantial progress in the process of identifying potential changes to business processes, systems and controls to support recognition and disclosure under the new standard.

Based on the conclusions of the assessment phase, the Company determined that the majority of its revenues, which are earned from construction, engineering and installation services and currently recognized using the percentage-of-completion method of accounting, are expected to follow a revenue recognition pattern consistent with current practice. The Company also determined that revenues related to time and materials projects and product sales are expected to follow a revenue recognition pattern consistent with current practice. The Company identified required changes under the new guidance for the recognition of royalty fees and the capitalization of contract fees. Approved change orders and revised cost estimates could result in cumulative catch up adjustments to revenues under certain circumstances.

The Company is implementing changes to its financial reporting process to comply with the disclosure requirements of the new guidance including: (i) changes to balances in contract assets and contract liabilities; and (ii) disaggregation of revenues. The Company plans to finalize the impacts of the new revenue standard on its operations, financial position and disclosures, as well as the determination of its transition method, in the third and fourth quarters of 2017, prior to its adoption in the first quarter of 2018.