Basis of Presentation

The accompanying consolidated financial statements of FLIR Systems, Inc. and its consolidated subsidiaries (the “Company”) are unaudited and have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. In the opinion of management, these statements have been prepared on the same basis as the audited consolidated financial statements and include all adjustments, consisting of only normal recurring adjustments, necessary for a fair presentation of the Company’s consolidated financial position and results of operations for the interim periods. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to such rules and regulations. These consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2017.

The accompanying consolidated financial statements include the accounts of FLIR Systems, Inc. and its wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated. The results of operations for the interim periods presented are not necessarily indicative of the operating results to be expected for any subsequent interim period or for the year ending December 31, 2018.

Recently Adopted Accounting Pronouncements

Financial Accounting Standards Board ("FASB") Accounting Standards Update ("ASU") No. 2016-18, "Statement of Cash Flows (Topic 230): Restricted Cash" ("ASU 2016-18"). Effective January 1, 2018, the Company adopted ASU 2016-18 on a retrospective basis. This update clarifies guidance on the classification and presentation of restricted cash in the statement of cash flows. The amendment requires restricted cash be included in an entity's cash and cash-equivalent balances in the statement of cash flows and also requires an entity to disclose information about the nature of the restrictions. Further, a reconciliation between the statement of financial position and the statement of cash flows must be disclosed when the statement of financial position includes more than one line item for cash, cash equivalents, restricted cash, and restricted cash equivalents. The Company's adoption of ASU 2016-18 did not have a material impact on the consolidated financial statements.

FASB ASU No. 2017-01, "Business Combinations (Topic 805): Clarifying the Definition of a Business" ("ASU 2017-01"). Effective January 1, 2018, the Company adopted ASU 2017-01. The amendments in this update clarify the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The Company's adoption of ASU 2017-01 did not have a material impact on the consolidated financial statements.

FASB ASU No. 2014-09, "Revenue - Revenue from Contracts with Customers" ("ASU 2014-09"). Effective January 1, 2018, the Company adopted ASU 2014-09 and all the related amendments ("new revenue standard" or "ASC 606") using the modified retrospective method to those contracts not yet completed as of January 1, 2018. As a result, the Company recognized the cumulative effect of initially applying the new revenue standard as an adjustment to the opening balance of retained earnings in the amount of approximately $1.0 million as of January 1, 2018. The comparative information has not been restated and continues to be reported under the accounting standards in effect for those periods. The Company expects the impact of the adoption of the new standard to be immaterial to net income on an ongoing basis.

FASB ASU No. 2016-16, "Intra-Entity Transfers of Assets Other Than Inventory" ("ASU 2016-16"). Effective January 1, 2018, the Company adopted ASU 2016-16, which eliminates the exception of recognizing, at the time of transfer, current and deferred income taxes for intra-entity asset transfers other than inventory. This new standard has been applied on a modified retrospective transition basis with an adjustment to the opening balance of retained earnings in the amount of approximately $80.0 million as of January 1, 2018.

Note 1. Basis of Presentation - (Continued)

Recently Adopted Accounting Pronouncements - (Continued)

The cumulative effect of the changes made to the Company's consolidated January 1, 2018 balance sheet for the adoption of ASU 2014-09, "Revenue - Revenue from Contracts with Customers" and ASU 2016-16, "Intra-Entity Transfers of Assets Other Than Inventory" were as follows (in thousands):



	Balance at December 31, 2017		Adjustments Due to ASU 2014-09			Adjustments Due to ASU 2016-16*			Balance at January 1, 2018
Assets
Accounts receivable, net	$	346,687	$	981		$	—		$	347,668
Inventories	372,183		(524		)	—			371,659
Deferred income taxes, net	21,001		—			74,367			95,368
Other assets	59,869		—			(1,005		)	58,864

Liabilities
Deferred revenue	25,614		(788		)	—			24,826
Deferred income taxes	12,496		290			1,422			14,208
Pension and other long-term liabilities	59,872		—			(8,030		)	51,842

Shareholders' Equity
Retained earnings	1,856,756		955			79,970			1,937,681

During the three-month period ended September 30, 2018, the Company recorded an additional deferred tax asset related to a prior period non-inventory intra-entity asset transfer that was not originally recorded upon adoption of ASU 2016-16 in the three-month period ended March 31, 2018. Consequently, an immaterial adjustment has been made to the table above related to the inclusion of the deferred income tax assets and corresponding impact to retained earnings in the amount of $74.4 million as of January 1, 2018.

In accordance with the new revenue standard requirements, the disclosure of the impact of adoption on our consolidated income statement and balance sheet was as follows (in thousands):



	Three Months Ended September 30, 2018						Nine Months Ended September 30, 2018
	As Reported		Balances Without Adoption of ASC 606		Effect of Change Higher/(Lower)		As Reported		Balances Without Adoption of ASC 606		Effect of Change Higher/(Lower)
Income Statement
Revenue	$	434,898	$	434,543	$	355	$	1,327,223	$	1,325,712	$	1,511
Cost of goods sold	212,824		212,747		77		654,684		654,400		284
Income tax provision	12,267		12,209		58		39,077		38,819		258
Net earnings	73,151		72,931		220		183,909		182,940		969



	September 30, 2018
	As Reported		Balances Without Adoption of ASC 606		Effect of Change Higher/(Lower)
Balance Sheet
Assets
Accounts receivable, net	$	291,094	$	288,602	$	2,492
Inventories	376,542		376,826		(284		)

Liabilities
Deferred revenue	30,493		30,493		—
Deferred income taxes	14,696		14,148		548

Equity
Retained earnings	2,055,139		2,053,479		1,660

For additional disclosures required by the new revenue standard see Note 2, "Revenue."