Summary of Significant Accounting Policies

Consolidation: The consolidated financial statements include the accounts of Moog Inc. and all of our U.S. and foreign subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.

Fiscal Year: Our fiscal year ends on the Saturday that is closest to September 30. The consolidated financial statements include 52 weeks for the years ended September 30, 2017 and October 1, 2016 and 53 weeks for the year ended October 3, 2015.

Operating Cycle: Consistent with industry practice, aerospace and defense related inventories, unbilled recoverable costs and profits on long-term contract receivables, customer advances and contract loss reserves include amounts relating to contracts having long production and procurement cycles, portions of which are not expected to be realized or settled within one year.

Foreign Currency Translation: Assets and liabilities of subsidiaries that prepare financial statements in currencies other than the U.S. dollar are translated using rates of exchange as of the balance sheet date and the statements of earnings are translated at the average rates of exchange for each reporting period.

Use of Estimates: The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates and assumptions.

Revenue Recognition: We recognize revenue using either the percentage of completion method for contracts or as units are delivered or services are performed.

Percentage of completion method for contracts: Revenue representing 38%, 34% and 33% of 2017, 2016 and 2015 sales, respectively, was accounted for using the percentage of completion, cost-to-cost method of accounting. This method of revenue recognition is predominantly used within the Aircraft Controls and Space and Defense Controls segments due to the contractual nature of the business activities, with the exception of their respective aftermarket activities. The contractual arrangements are either firm fixed-price or cost-plus contracts and are primarily with the U.S. Government or its prime subcontractors, foreign governments or commercial aircraft manufacturers, including Boeing and Airbus. The nature of the contractual arrangements includes customers’ requirements for delivery of hardware as well as funded nonrecurring development work in anticipation of follow-on production orders.

Revenue on contracts using the percentage of completion, cost-to-cost method of accounting is recognized as work progresses toward completion as determined by the ratio of cumulative costs incurred to date to estimated total contract costs at completion, multiplied by the total estimated contract revenue, less cumulative revenue recognized in prior periods. Changes in estimates affecting sales, costs and profits are recognized in the period in which the change becomes known using the cumulative catch-up method of accounting, resulting in the cumulative effect of changes reflected in the period. Estimates are reviewed and updated quarterly for substantially all contracts. A significant change in an estimate on one or more contracts could have a material effect on our results of operations.

Occasionally, it is appropriate to combine or segment contracts. Contracts are combined in those limited circumstances when they are negotiated as a package in the same economic environment with an overall profit margin objective and constitute, in essence, an agreement to do a single project. In such cases, revenue and costs are recognized over the performance period of the combined contracts as if they were one. Contracts are segmented in limited circumstances if the customer had the right to accept separate elements of the contract and the total amount of the proposals on the separate components approximated the amount of the proposal on the entire project. For segmented contracts, revenue and costs are recognized as if they were separate contracts over the performance periods of the individual elements or phases.

Contract costs include only allocable, allowable and reasonable costs, as determined in accordance with the Federal Acquisition Regulations and the related Cost Accounting Standards for applicable U.S. Government contracts, and are included in cost of sales when incurred. The nature of these costs includes development engineering costs and product manufacturing costs including direct material, direct labor, other direct costs and indirect overhead costs. Contract profit is recorded as a result of the revenue recognized less costs incurred in any reporting period. Amounts representing performance incentives, penalties, contract claims or change orders are considered in estimating revenues, costs and profits when they can be reliably estimated and realization is considered probable. Revenue recognized on contracts for unresolved claims or unapproved contract change orders was not material for 2017, 2016 or 2015.

For contracts with anticipated losses at completion, a provision for the entire amount of the estimated remaining loss is charged against income in the period in which the loss becomes known. Contract losses are determined considering all direct and indirect contract costs, exclusive of any selling, general or administrative cost allocations that are treated as period expenses. Loss reserves are more common on firm fixed-price contracts that involve, to varying degrees, the design and development of new and unique controls or control systems to meet the customers’ specifications.

As units are delivered or services are performed: Revenue representing 62%, 66% and 67% of 2017, 2016 and 2015 sales, respectively, were recognized as units were delivered or as service obligations were satisfied. Revenue is recognized when the risks and rewards of ownership and title to the product are transferred to the customer. When engineering or similar services are performed, revenue is recognized upon completion of the obligation including any delivery of engineering drawings or technical data. This method of revenue recognition is predominantly used within the Industrial Systems and Components segments, as well as with aftermarket activity. Profits are recorded as costs are relieved from inventory and charged to cost of sales and as revenue is recognized. Inventory costs include all product manufacturing costs such as direct material, direct labor, other direct costs and indirect overhead cost allocations.

Shipping and Handling Costs: Shipping and handling costs are included in cost of sales.

Research and Development: Research and development costs are expensed as incurred and include salaries, benefits, consulting, material costs and depreciation.

Bid and Proposal Costs: Bid and proposal costs are expensed as incurred and classified as selling, general and administrative expenses.

Equity-Based Compensation: Our stock-based compensation plans allow for various types of stock-based incentive awards. The types and mix of stock-based incentive awards are evaluated on an on-going basis and may vary based on our overall strategy regarding compensation. Equity-based compensation expense is based on share-based payment awards that are ultimately expected to vest over the requisite services periods and are based on the fair value of the award measured on the grant date. Vesting requirements vary for directors, officers and key employees. In general, awards granted to officers and key employees principally vest over three years, in equal annual installments for time-based awards and in three years cliff vest for performance-based awards. Equity-based compensation expense is included in selling, general and administrative expenses.

Earnings Per Share: Basic and diluted weighted-average shares outstanding are as follows:



	2017	2016	2015
Basic weighted-average shares outstanding	35,852,448	36,277,445	38,945,880
Dilutive effect of equity-based awards	377,595	251,899	388,640
Diluted weighted-average shares outstanding	36,230,043	36,529,344	39,334,520

Cash and Cash Equivalents: All highly liquid investments with an original maturity of three months or less are considered cash equivalents.

Allowance for Doubtful Accounts: The allowance for doubtful accounts is based on our assessment of the collectibility of customer accounts. The allowance is determined by considering factors such as historical experience, credit quality, age of the accounts receivable balances and current economic conditions that may affect a customer’s ability to pay.

Inventories: Inventories are stated at the lower-of-cost-or-market with cost determined primarily on the first-in, first-out (FIFO) method of valuation.

Property, Plant and Equipment: Property, plant and equipment are stated at cost. Plant and equipment are depreciated principally using the straight-line method over the estimated useful lives of the assets, generally ranging from 15 to 40 years for buildings and improvements, 5 to 15 years for machinery and equipment and 3 to 7 years for computer equipment and software. Leasehold improvements are amortized on a straight-line basis over the term of the lease or the estimated useful life of the asset, whichever is shorter.

Goodwill: We test goodwill for impairment at the reporting unit level on an annual basis or more frequently if an event occurs or circumstances change that indicate that the fair value of a reporting unit is likely to be below its carrying amount. We also test goodwill for impairment when there is a change in reporting units.

We may elect to perform a qualitative assessment that considers economic, industry and company-specific factors for all or selected reporting units. If, after completing this assessment, it is determined that it is more likely than not that the fair value of a reporting unit is less than its carrying value, we proceed to a quantitative test. We may also elect to perform a quantitative test instead of a qualitative test for any or all of our reporting units.

Quantitative testing requires a comparison of the fair value of each reporting unit to its carrying value. We typically use the discounted cash flow method to estimate the fair value of our reporting units. The discounted cash flow method incorporates various assumptions, the most significant being projected revenue growth rates, operating margins and cash flows, the terminal growth rate and the weighted-average cost of capital. If the carrying value of the reporting unit exceeds its fair value, goodwill is considered impaired and any loss must be measured. To determine the amount of the impairment loss, the implied fair value of goodwill is determined by assigning a fair value to all of the reporting unit's assets and liabilities, including any unrecognized intangible assets, as if the reporting unit had been acquired in a business combination at fair value. If the carrying amount of the reporting unit goodwill exceeds the implied fair value of that goodwill, an impairment loss would be recognized in an amount equal to that excess.

We recorded a $4,800 goodwill impairment charge in 2016 in the additive manufacturing reporting unit within our Space and Defense Controls segment. There were no impairment charges recorded in 2017 or 2015.

Acquired Intangible Assets: Acquired identifiable intangible assets are recorded at cost and are amortized over their estimated useful lives.

Impairment of Long-Lived Assets: Long-lived assets, including acquired identifiable intangible assets, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of those assets may not be recoverable. We use undiscounted cash flows to determine whether impairment exists and measure any impairment loss using discounted cash flows.

In 2017, we recorded $1,378 of impairment charges in our Space and Defense Controls segment. These charges relate to a write down on the value of equipment that no longer meets production requirements and is held for sale. These charges are included as other expense in the consolidated statement of earnings.

In 2016, we recorded $4,913 of impairment charges in our Aircraft Controls segment. These charges primarily related to intangible assets as a result of restructuring actions taken for a product line we are no longer pursuing. These charges are included in restructuring in the consolidated statements of earnings.

In 2015, we recorded $2,432 of impairment charges in our Industrial Systems segment. These charges primarily related to intangible assets from a wind energy product line and are included as other expense. We also recorded an additional $472 impairment charge related to intangible assets on the product line we decided to exit in 2014, included as restructuring in the consolidated statements of earnings.

Product Warranties: In the ordinary course of business, we warrant our products against defect in design, materials and workmanship typically over periods ranging from twelve to sixty months. We determine warranty reserves needed by product line based on historical experience and current facts and circumstances. Activity in the warranty accrual is summarized as follows:



	2017			2016			2015
Warranty accrual at beginning of year	$	21,363		$	18,660		$	19,953
Additions from acquisitions	448			—			—
Warranties issued during current year	17,021			13,272			9,666
Adjustments to pre-existing warranties	(509		)	(1,463		)	(2,416		)
Reductions for settling warranties	(12,747		)	(8,486		)	(7,448		)
Foreign currency translation	272			(620		)	(1,095		)
Warranty accrual at end of year	$	25,848		$	21,363		$	18,660

Financial Instruments: Our financial instruments consist primarily of cash and cash equivalents, receivables, notes payable, accounts payable, long-term debt, interest rate swaps and foreign currency contracts. The carrying values for our financial instruments approximate fair value with the exception at times of long-term debt. We do not hold or issue financial instruments for trading purposes.

We carry derivative instruments on the consolidated balance sheets at fair value, determined by reference to quoted market prices. The accounting for changes in the fair value of a derivative instrument depends on whether it has been designated and qualifies as part of a hedging relationship and, if so, the reason for holding it. Our use of derivative instruments is generally limited to cash flow hedges of certain interest rate risks and minimizing foreign currency exposure on foreign currency transactions, which are typically designated in hedging relationships, and intercompany balances, which are not designated as hedging instruments. Cash flows resulting from forward contracts are accounted for as hedges of identifiable transactions or events and classified in the same category as the cash flows from the items being hedged.

Reclassifications: Certain prior year amounts have been reclassified to conform to current year's presentation. Refer to the following table for a summary of ASUs we adopted during 2017 and the related financial statement impact. The Consolidated Balance Sheets and Indebtedness, Employee Benefit Plans, Income Taxes and Segment footnotes have been restated to reflect these changes.

Recent Accounting Pronouncements:

Recent Accounting Pronouncements Adopted



Standard	Description	Financial Statement Effect or Other Significant Matters
ASU no. 2015-03 Presentation of Debt Issuance Costs (And All Related ASUs)	This standard requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The provisions of this standard and all subsequently issued guidance are effective for fiscal years beginning after December 15, 2015 and interim periods within those fiscal years. Early adoption is permitted and retrospective application is required.	We adopted this standard on a retrospective basis, resulting in the reclassification of $5,457 of debt issuance costs as of October 1, 2016 previously reported as Other Assets in our balance sheet to Long Term Debt, excluding current installments.
		Date adopted: Q1 2017
ASU no. 2015-07 Disclosures for Investments in Certain Entities that Calculate Net Asset Value per Share	This standard eliminates the requirement to classify investments valued using the net asset value per share practical expedient and instead requires these investments to be disclosed separately. The provisions of this standard are effective for fiscal years beginning after December 15, 2015 and all interim periods within those fiscal years. Early adoption is permitted and retrospective application is required.	We adopted this standard on a retrospective basis, resulting in the reclassification of $302,713 of investments measured at fair value using the net asset value per share approach and previously reported in the fair value hierarchy as of October 1, 2016 to be reported separately from the fair value hierarchy.
		Date adopted: Q1 2017
ASU no. 2015-17 Balance Sheet Classification of Deferred Taxes	The standard amends existing guidance to require presentation of deferred tax assets and liabilities as noncurrent within the balance sheet. The provisions of the standard are effective for fiscal years beginning after December 15, 2016 and interim periods within those fiscal years. Early adoption is permitted and may be applied either prospectively or retrospectively.	We adopted this standard on a retrospective basis, resulting in the reclassification of a net $92,620 of previously reported current deferred income tax assets and liabilities as of October 1, 2016 to the appropriate long term deferred income tax classification based upon the net tax position within each of our relevant taxing jurisdictions.
		Date early adopted: Q1 2017
ASU no. 2016-09 Improvements to Employee Share-Based Payment Accounting	This standard simplifies several aspects of the accounting for share-based payment transactions, including income tax consequences, statement of cash flows classifications, share repurchases relating to tax withholdings and forfeiture accounting. The provisions of this standard are effective for fiscal years beginning after December 15, 2016 and interim periods within those fiscal years.	We adopted this standard on a prospective basis and as a result prior periods have not been adjusted. Going forward, recognized excess tax benefits previously reported as part of additional paid-in capital in our balance sheet will be included as part of income tax expense in our income statement. Additionally, cash flow relating to these excess tax benefits previously reported as a financing activity will be included as an operating activity.
		Date early adopted: Q1 2017
ASU no. 2016-18 Statement of Cash Flows Restricted Cash	This standard amends existing guidance to require that the Statement of Cash Flows explain the change during the period in cash, cash equivalents and restricted cash. Amounts described as restricted cash are now included, along with cash and cash equivalents, when reconciling beginning-of-period and end-of-period amounts shown on the Statement of Cash Flows. The provisions of the standard are effective for fiscal years beginning after December 15, 2017 and interim periods within those fiscal years. Early adoption is permitted, but requires retrospective application in the fiscal year adopted.	We adopted this standard on a retrospective basis, resulting in restricted cash of $37,366 as of April 1, 2017 being included, along with cash and cash equivalents, when reconciling beginning-of-period and end-of-period amounts shown on the Statement of Cash Flows. There were no changes required to prior periods. Restricted cash as of September 30, 2017 was not material.
		Date early adopted: Q2 2017

Recent Accounting Pronouncements Not Yet Adopted



Standard	Description	Financial Statement Effect or Other Significant Matters
ASU no. 2014-09 Revenue from Contracts with Customers (And All Related ASUs)	The standard requires revenue recognition to depict the transfer of 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 standard also requires additional disclosures about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and assets recognized from costs incurred to obtain or fulfill a contract. The provisions of the standard, as well as all subsequently issued clarifications to the standard, are effective for fiscal years beginning after December 15, 2017 and interim periods within those fiscal years. The standard can be adopted using either a full retrospective or modified retrospective approach.	We expect to adopt the standard using the modified retrospective method, under which prior years' results are not restated, but supplemental information will be provided in our disclosures that will present fiscal 2019 results before adoption of the standard. In addition, a cumulative adjustment may be necessary to Shareholder's Equity at the beginning of fiscal 2019. We are assessing the impact of the standard on our financial statements and related disclosures, internal controls and financial policies and information technology systems. We have not yet quantified the impact on our financial statements and related disclosures.
		Planned date of adoption: Q1 2019
ASU no. 2016-01 Recognition and Measurement of Financial Assets and Financial Liabilities	The standard requires most equity investments to be measured at fair value, with subsequent changes in fair value recognized in net income. The amendment also impacts the measurement of financial liabilities under the fair value option as well as certain presentation and disclosure requirements for financial instruments. The provisions of the standard are effective for fiscal years beginning after December 15, 2017 and interim periods within those fiscal years. Early adoption is permitted for some, but not all, provisions. The amendment requires certain provisions to be applied prospectively and others to be applied by means of a cumulative-effect adjustment.	We are currently evaluating the effect on our financial statements and related disclosures.
		Planned date of adoption: Q1 2019
ASU no. 2016-02 Leases (And All Related ASUs)	The standard requires most lease arrangements to be recognized in the balance sheet as lease assets and lease liabilities. The standard also requires additional disclosures about the leasing arrangements. The provisions of the standard are effective for fiscal years beginning after December 15, 2018 and interim periods within those years. Early adoption is permitted.	We are currently evaluating the effect on our financial statements and related disclosures.
		Planned date of adoption: Q1 2020
ASU no. 2017-07 Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost	The standard amends existing guidance on the presentation of net periodic benefit cost in the income statement and what qualifies for capitalization on the balance sheet. The provisions of the standard are effective for fiscal years beginning after December 15, 2017 and interim periods within those fiscal years. Early adoption is permitted as of the beginning of an annual period. The amendment requires income statement presentation provisions to be applied retrospectively and capitalization in assets provisions to be applied prospectively.	We are currently evaluating the effect on our financial statements and related disclosures.
		Planned date of adoption: Q1 2019
ASU no. 2017-12 Targeted Improvements to Accounting for Hedging Activities	The standard expands the hedging strategies eligible for hedge accounting, while simplifying presentation and disclosure by eliminating separate measurement and reporting of hedge ineffectiveness. The provisions of the standard are effective for fiscal years beginning after December 15, 2018 and interim periods within those fiscal years. Early adoption is permitted.	We are currently evaluating the effect on our financial statements and related disclosures.
		Planned date of adoption: Q1 2020

We consider the applicability and impact of all ASUs. ASUs not listed above were assessed and determined to be either not applicable, or had or are expected to have minimal impact on our financial statements and related disclosures.