SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

a. Principles of Consolidation

The following discussion pertains to Emmis Communications Corporation (“ECC”) and its subsidiaries (collectively, “Emmis,” the “Company,” or “we”). All significant intercompany balances and transactions have been eliminated.

b. Organization

Emmis is a diversified media company with radio broadcasting and magazine publishing operations. We own and operate four FM and one AM radio stations serving the nation’s top two markets – New York and Los Angeles, although one station in New York is operated pursuant to a Local Programming and Marketing Agreement ("LMA") whereby a third party provides the programming for the station and sells all advertising within that programming. See Note 1e below for more discussion of LMAs. Additionally, we own and operate fifteen FM and three AM radio stations with strong positions in St. Louis, Austin (we have a 50.1% controlling interest in our radio stations located there), Indianapolis and Terre Haute. Emmis also developed and licenses TagStation®, a cloud-based software platform that allows a broadcaster to manage album art, meta data and enhanced advertising on its various broadcasts, and has developed NextRadio®, a smartphone application that marries over-the-air FM radio broadcasts with visual and interactive features on smartphones.

In addition to our radio businesses, we operate a radio news network in Indiana, publish Texas Monthly, Los Angeles, Atlanta, Indianapolis Monthly, Cincinnati and Orange Coast, and operate Digonex, a dynamic pricing business.

Substantially all of ECC’s business is conducted through its subsidiaries. Our credit agreement, dated June 10, 2014 (the “2014 Credit Agreement”), contains certain provisions that may restrict the ability of ECC’s subsidiaries to transfer funds to ECC in the form of cash dividends, loans or advances.

c. Revenue Recognition

Broadcasting revenue is recognized as advertisements are aired. Publication revenue is recognized in the month of delivery of the publication. Both broadcasting revenue and publication revenue recognition is subject to meeting certain conditions such as persuasive evidence that an arrangement exists and collection is reasonably assured. These criteria are generally met at the time the advertisement is aired for broadcasting revenue and upon delivery of the publication for publication revenue. Advertising revenues presented in the financial statements are reflected on a net basis, after the deduction of advertising agency fees, usually at a rate of 15% of gross revenues.

Digonex provides a dynamic pricing service to online retailers, attractions, live event producers and other customers. Revenue is recognized as recommended prices are delivered to customers. In some cases, this is upon initial delivery of prices, such as for implementations, or over the period of the services agreement for fee-based pricing. Revenue pursuant to some service agreements is not earned until tickets or merchandise are sold and, therefore, revenue is recognized as tickets are sold for the related events or as merchandise is sold.

d. Allowance for Doubtful Accounts

An allowance for doubtful accounts is recorded based on management’s judgment of the collectability of receivables. When assessing the collectability of receivables, management considers, among other things, historical loss experience and existing economic conditions. Amounts are written off after all normal collection efforts have been exhausted. The activity in the allowance for doubtful accounts for the three years ended February 29, 2016 was as follows:



	Balance At Beginning Of Year		Provision		Write-Offs			Balance At End Of Year
Year ended February 28, 2014	$	523	$	510	$	(459	)	$	574
Year ended February 28, 2015	574		627		(536		)	665
Year ended February 29, 2016	665		626		(357		)	934

e. Local Programming and Marketing Agreement Fees

The Company from time to time enters into LMAs in connection with acquisitions and dispositions of radio stations, pending regulatory approval of transfer of the FCC licenses. Under the terms of these agreements, the acquiring company makes specified periodic payments to the holder of the FCC license in exchange for the right to program and sell advertising for a specified portion of the station’s inventory of broadcast time. The acquiring company records revenues and expenses associated with the portion of the station’s inventory of broadcast time it manages. Nevertheless, as the holder of the FCC license, the owner-operator retains control and responsibility for the operation of the station, including responsibility over all programming broadcast on the station.

Active LMA

On April 26, 2012, the Company entered into an LMA with New York AM Radio, LLC (“98.7FM Programmer”) pursuant to which, commencing April 30, 2012, 98.7FM Programmer purchased from Emmis the right to provide programming on 98.7FM until August 31, 2024. Disney Enterprises, Inc., the parent company of 98.7FM Programmer, has guaranteed the obligations of 98.7FM Programmer under the LMA. The Company retains ownership and control of the station, including the related FCC license during the term of the LMA and received an annual fee from 98.7FM Programmer of $8.4 million for the first year of the term under the LMA, which fee increases by 3.5% each year thereafter until the LMA’s termination. This LMA fee revenue is recorded on a straight-line basis over the term of the LMA. Emmis retains the FCC license of 98.7FM after the term of the LMA expires.

Terminated LMAs

On February 11, 2014, the Company entered into an LMA in connection with its agreement to purchase WBLS-FM and WLIB-AM in New York City from YMF Media New York LLC and YMF Media New York License LLC (collectively, "YMF"). The LMA, which commenced on March 1, 2014, gave Emmis the right to program and sell advertising for the two New York stations. Emmis paid YMF $1.3 million per month and reimbursed YMF for certain monthly expenses. The monthly LMA fee decreased to approximately $0.74 million after the first closing of the purchase of the stations, which occurred on June 10, 2014, and ceased effective with the second closing on February 13, 2015. The LMA fees paid after the first closing were recognized as a liability as of the date of purchase of the stations on June 10, 2014. Accordingly, LMA fees incurred after June 10, 2014 did not impact our results of operations. During the year ended February 28, 2015, Emmis recorded $4.2 million of LMA expense. See Note 7 for more discussion of the Company's purchase of WBLS-FM and WLIB-AM from YMF.

LMA fees recorded as net revenues in the accompanying consolidated statements of operations were as follows for the years ended February 2014, 2015 and 2016:



	For the years ended February 28 (29),
	2014		2015		2016
98.7FM, New York	$	10,331	$	10,331	$	10,331

f. Share-based Compensation

The Company determines the fair value of its employee stock options at the date of grant using a Black-Scholes option-pricing model. The Black-Scholes option pricing model was developed for use in estimating the value of exchange-traded options that have no vesting restrictions and are fully transferable. The Company’s employee stock options have characteristics significantly different than these traded options. In addition, option pricing models require the input of highly subjective assumptions, including the expected stock price volatility and expected term of the options granted. The Company relies heavily upon historical data of its stock price when determining expected volatility, but each year the Company reassesses whether or not historical data is representative of expected results. See Notes 3 and 4 for more discussion of share-based compensation.

g. Cash and Cash Equivalents

Emmis considers time deposits, money market fund shares and all highly liquid debt investment instruments with original maturities of three months or less to be cash equivalents. At times, such deposits may be in excess of FDIC insurance limits.

h. Restricted Cash

Restricted cash generally represents either cash on deposit in trust accounts related to our 98.7FM LMA in New York City that services long-term debt as discussed in Note 5, or cash collected by our wholly-owned subsidiary, NextRadio LLC, from other radio broadcasters for payments to Sprint. Usage of cash collected by NextRadio LLC is restricted for specific purposes by funding agreements. For more discussion of NextRadio LLC, see Note 8.

i. Property and Equipment

Property and equipment are recorded at cost. Depreciation is generally computed using the straight-line method over the estimated useful lives of the related assets, which are 39 years for buildings, the shorter of economic life or expected lease term for leasehold improvements, five to seven years for broadcasting equipment, five years for automobiles, and three to five years for office equipment. Maintenance, repairs and minor renewals are expensed as incurred; improvements are capitalized. On a continuing basis, the Company reviews the carrying value of property and equipment for impairment. If events or changes in circumstances were to indicate that an asset carrying value may not be recoverable, a write-down of the asset would be recorded through a charge to operations. See Note 1p for more discussion of impairment policies related to our property and equipment. Depreciation expense for the years ended February 2014, 2015 and 2016 was $4.8 million, $5.0 million and $4.3 million, respectively.

j. Intangible Assets and Goodwill

Indefinite-lived Intangibles and Goodwill

In connection with past acquisitions, a significant amount of the purchase price was allocated to radio broadcasting licenses, goodwill and other intangible assets. Goodwill consists of the excess of the purchase price over the fair value of tangible and identifiable intangible net assets acquired. In accordance with ASC Topic 350, “Intangibles—Goodwill and Other,” goodwill and radio broadcasting licenses are not amortized, but are tested at least annually for impairment at the reporting unit level and unit of accounting level, respectively. We test for impairment annually, on December 1 of each year, or more frequently when events or changes in circumstances or other conditions suggest impairment may have occurred. Impairment exists when the asset carrying values exceed their respective fair values, and the excess is then recorded to operations as an impairment charge. See Note 9, Intangible Assets and Goodwill, for more discussion of our interim and annual impairment tests performed during the three years ended February 29, 2016.

Definite-lived Intangibles

The Company’s definite-lived intangible assets primarily consist of patents, trademarks, customer lists and radio programming contracts which are amortized over the period of time the intangible assets are expected to contribute directly or indirectly to the Company’s future cash flows.

k. Advertising and Subscription Acquisition Costs

Advertising and subscription acquisition costs are expensed when incurred. Advertising expense for the years ended February 2014, 2015 and 2016 was $2.8 million, $3.2 million and $4.1 million, respectively.

l. Investments

For those investments in common stock or in-substance common stock in which the Company has the ability to exercise significant influence over the operating and financial policies of the investee, the investment is accounted for under the equity method. For other investments held at February 29, 2016, the Company applies the accounting guidance for certain investments in debt and equity securities. Emmis’ equity method investment reports on a fiscal year ending December 31, which Emmis incorporates into its fiscal year ended February 28 (29).

Emmis has two investments, the carrying values of which are summarized in the following table and discussed below:



	For the years ending February 28 (29),
	2015		2016
Available-for-sale investment	$	500	$	800
Equity method investment	526		337
Total investments	$	1,026	$	1,137

Equity method investment

Emmis has a minority interest in a partnership that owns and operates various entertainment websites.

Available for sale investment

Emmis’ available for sale investment is an investment in the preferred shares of a non-public company. During the year ended February 29, 2016, Emmis received an additional $0.3 million of preferred shares of this non-public company in exchange for promotional airtime on its various radio stations. This investment is accounted for under the provisions of ASC 320, and as such, is carried at its fair value which Emmis believes approximates its cost basis of $0.8 million.

During the year ended February 28, 2013, Emmis made investments totaling $6.0 million in Courseload, Inc, a provider of online textbooks and other course material. Emmis made additional investments in Courseload Inc. of $0.3 million and $0.4 million during the years ended February 28, 2014 and 2015, respectively. During the year ended February 28, 2015, Emmis recorded a noncash impairment charge of $6.7 million in other income (expense), net in the accompanying consolidated statements of operations as it deemed the investment was impaired and the impairment was other-than-temporary. The impairment charge recorded during the year ended February 28, 2015 reduced the carrying value of this investment to zero as of February 28, 2015.

Unrealized gains and losses would be reported in other comprehensive income until realized, at which point they would be recognized in the consolidated statements of operations. If the Company determines that the value of an investment is other-than-temporarily impaired, the Company will recognize, through the statements of operations, a loss on the investment.

m. Deferred Revenue and Barter Transactions

Deferred revenue includes deferred magazine subscription revenue, deferred barter and other transactions in which payments are received prior to the performance of services (i.e. cash-in-advance advertising and prepaid LMA payments). Magazine subscription revenue is recognized when the publication is shipped. Barter transactions are recorded at the estimated fair value of the product or service received. Revenue from barter transactions is recognized when commercials are broadcast or a publication is delivered. The appropriate expense or asset is recognized when merchandise or services are used or received. Barter revenues for the years ended February 2014, 2015 and 2016 were $8.5 million, $8.5 million and $8.5 million, respectively, and barter expenses were $8.7 million, $8.7 million, and $8.5 million, respectively.

n. Earnings Per Share

ASC Topic 260 requires dual presentation of basic and diluted income (loss) per share (“EPS”) on the face of the income statement for all entities with complex capital structures. Basic EPS is computed by dividing net income (loss) attributable to common shareholders by the weighted-average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted. Potentially dilutive securities at February 2014, 2015 and 2016 consisted of stock options, restricted stock awards and preferred stock.

The following table sets forth the calculation of basic and diluted net income (loss) per share from continuing operations:



	For the year ended
	February 28, 2014						February 28, 2015							February 29, 2016
	Net Loss			Shares	Net Loss Per Share		Net Income			Shares	Net Income Per Share			Net Loss		Shares	Net Loss Per Share
	(amounts in 000’s, except per share data)
Basic net income (loss) per common share:
Net income (loss) available to common shareholders from continuing operations	$	43,806		40,506	$	1.08	$	(99,259	)	42,537	$	(2.33	)	$	1,952	44,136	$	0.04
Impact of equity awards	—			3,264			—			—				—		1,128
Impact of conversion of preferred stock into common stock	(325		)	2,272			—			—				—		—
Diluted net income (loss) per common share:
Net income (loss) available to common shareholders from continuing operations	$	43,481		46,042	$	0.94	$	(99,259	)	42,537	$	(2.33	)	$	1,952	45,264	$	0.04

Shares excluded from the calculation as the effect of their conversion into shares of our common stock would be antidilutive were as follows:



	For the year ended February 28 (29),
	2014	2015	2016
	(shares in 000’s )
Preferred stock	—	2,266	2,426
Stock options and restricted stock awards	1,995	4,324	5,115
Antidilutive common share equivalents	1,995	6,590	7,541

o. Income Taxes

The Company accounts for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequence of events that have been recognized in the Company’s financial statements or income tax returns. Income taxes are recognized during the year in which the underlying transactions are reflected in the consolidated statements of operations. Deferred taxes are provided for temporary differences between amounts of assets and liabilities as recorded for financial reporting purposes and amounts recorded for income tax purposes. After determining the total amount of deferred tax assets, the Company determines whether it is more likely than not that some portion of the deferred tax assets will not be realized. If the Company determines that a deferred tax asset is not likely to be realized, a valuation allowance will be established against that asset to record it at its expected realizable value.

p. Long-Lived Tangible Assets

The Company periodically considers whether indicators of impairment of long-lived tangible assets are present. If such indicators are present, the Company determines whether the sum of the estimated undiscounted cash flows attributable to the assets in question are less than their carrying value. If less, the Company recognizes an impairment loss based on the excess of the carrying amount of the assets over their respective fair values. Fair value is determined by discounted future cash flows, appraisals and other methods. If the assets determined to be impaired are to be held and used, the Company recognizes an impairment charge to the extent the asset’s carrying value is greater than the fair value. The fair value of the asset then becomes the asset’s new carrying value, which, if applicable, the Company depreciates or amortizes over the remaining estimated useful life of the asset.

q. Noncontrolling Interests

The Company follows Accounting Standards Codification paragraph 810-10-65-1 to report the noncontrolling interests related to our Austin radio partnership and Digonex. We have a 50.1% controlling interest in our Austin radio partnership. We do not own any of the common equity of Digonex, but we consolidate the entity because we control its board of directors via rights granted in convertible preferred stock and convertible debt that we own.

Noncontrolling interests represents the noncontrolling interest holders' proportionate share of the equity of the Austin radio partnership and Digonex. Noncontrolling interests are adjusted for the noncontrolling interest holders' proportionate share of the earnings or losses of the applicable entity. The noncontrolling interest continues to be attributed its share of losses even if that attribution results in a deficit noncontrolling interest balance. Below is a summary of the noncontrolling interest activity for the years ended February 2015 and 2016:



	Austin radio partnership			Digonex			Other			Total noncontrolling interests
Balance, February 28, 2014	$	47,604		$	—		$	14		$	47,618
Net income (loss)	5,697			(2,419		)	(4		)	3,274
Payments of dividends and distributions to noncontrolling interests	(5,418		)	—			(10		)	(5,428		)
Acquisition of noncontrolling interest	—			1,197			—			1,197
Balance, February 28, 2015	47,883			(1,222		)	$	—		46,661
Net income (loss)	5,519			(7,937		)	—			(2,418		)
Payments of dividends and distributions to noncontrolling interests	(5,846		)	—			—			(5,846		)
Balance, February 29, 2016	$	47,556		$	(9,159	)	$	—		$	38,397

r. Estimates

The preparation of financial statements in accordance with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses in the financial statements and in disclosures of contingent assets and liabilities. Actual results could differ from those estimates.

s. National Representation Agreement

On October 1, 2007, Emmis terminated its existing national sales representation agreement with Interep National Radio Sales, Inc. (“Interep”) and entered into a new agreement with Katz Communications, Inc. (“Katz”) extending through March 2018. Emmis’ existing contract with Interep at the time extended through September 2011. Emmis, Interep and Katz entered into a tri-party termination and mutual release agreement under which Interep agreed to release Emmis from its future contractual obligations in exchange for a one-time payment of $15.3 million, which was paid by Katz on behalf of Emmis as an inducement for Emmis to enter into the new long-term contract with Katz. Emmis measured and recognized the charge associated with terminating the Interep contract as of the effective termination date, which was recorded as a noncash contract termination fee in the year ended February 2008. The liability established as a result of the termination represents an incentive received from Katz that is being recognized as a reduction of our national agency commission expense over the term of the agreement with Katz. The current portion of this liability is included in other current liabilities and the long-term portion of this liability is included in other noncurrent liabilities in the accompanying consolidated balance sheets at February 28, 2015 and February 29, 2016.

t. Liquidity

The Company continually projects its anticipated cash needs, which include its operating needs, capital needs, and principal and interest payments on its indebtedness. As of the filing of this Form 10-K, management believes the Company can meet its liquidity needs through the end of fiscal year 2017 with cash and cash equivalents on hand, projected cash flows from operations, and, to the extent necessary, through its borrowing capacity under the 2014 Credit Agreement, which was $17.0 million at February 29, 2016. Based on these projections, management also believes the Company will be in compliance with its debt covenants through the end of fiscal year 2017.

u. Recent Accounting Standards Updates

Adoption of New Accounting Standards Updates

In April 2014, the FASB issued Accounting Standards Update 2014-08, Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity, to update the criteria for reporting discontinued operations and enhance related disclosures. Under the new guidance, only disposals that have a major effect through a strategic shift on an organization’s operations and financial results should be presented as discontinued operations. In addition, the new guidance requires expanded disclosures that will provide financial statement users with more information about the assets, liabilities, income, and expenses of discontinued operations. The guidance was effective for the Company as of March 1, 2015. This guidance did not have any affect on the Company's results of operations, cash flows or financial condition. The Company believes that implementation of this guidance will reduce the number of transactions that will qualify for reporting as discontinued operations in the future.

In April 2015, the FASB issued Accounting Standards Update 2015-03, Interest – Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs. This update requires that all debt issuance costs be presented as an offset to the associated debt liability rather than as a deferred charge. This guidance was modified in August 2015 to allow the existing presentation to continue for line-of-credit arrangements. Although the guidance would have been effective for the Company as of March 1, 2016, the Company chose to adopt the provisions of this ASU as of February 29, 2016 as permitted by the FASB. The Company chose to early-adopt this Accounting Standards Update as it simplified the presentation of debt issuance costs and the associated debt liability.

As required by Accounting Standards Update 2015-03, the reclassification of debt issuance costs was applied retrospectively. The following depicts the impact of the adoption of this Accounting Standards Update on our consolidated balance sheets as of February 28, 2015. The adoption of this Accounting Standards Update did not have any effect on our results of operations or cash flows.



	February 28, 2015 (As originally reported)	Impact of Adoption of ASU 2015-03		February 28, 2015 (As adjusted)
ASSETS:
Deferred debt issuance costs, net of accumulated amortization of $868	3,438	(3,438	)	—
Total other assets, net	10,420	(3,438	)	6,982
Total assets	334,732	(3,438	)	331,294
LIABILITIES AND DEFICIT:
Long-term debt, net of current portion	254,150	(3,438	)	250,712
Total liabilities	346,881	(3,438	)	343,443
Total liabilities and deficit	334,732	(3,438	)	331,294

In November 2015, the FASB issued Accounting Standards Update 2015-17, Income Taxes - Balance Sheet Classification of Deferred Taxes. This update simplifies the presentation of deferred taxes by requiring deferred tax assets and liabilities to be presented as noncurrent in a classified balance sheet. The Company early adopted this update as of September 1, 2015 as permitted by the FASB. Adoption of this update did not have any effect on the Company's financial position as the Company did not have any deferred tax assets or liabilities classified as current in any period presented in the accompanying consolidated balance sheets.

Recent Accounting Standards Updates Not Yet Adopted

In May 2014, the FASB issued Accounting Standards Update 2014-09, Revenue from Contracts with Customers, to clarify the principles used to recognize revenue for all entities. In April 2015, the FASB voted to defer the effective date of this Accounting Standards Update for one year. This guidance will be effective for the Company as of March 1, 2018. The Company is currently evaluating the method of adoption and impact, if any, the adoption of this guidance will have on its consolidated financial statements.

In August 2014, the FASB issued Accounting Standards Update 2014-15, Presentation of Financial Statements - Going Concern (Subtopic 205-40) - Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern. This update provides guidance about management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and to provide related footnote disclosures. This guidance was effective for the Company as of March 1, 2016. The adoption of this update is not expected to have an impact on the Company’s consolidated financial statements.

In April 2015, the FASB issued Accounting Standards Update 2015-05, Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement. This update provides guidance as to when a company using a cloud computing service that includes a software license should capitalize and depreciate the software license. This guidance was effective for the Company as of March 1, 2016. The Company is currently evaluating this guidance, but does not anticipate it will have a material impact on its consolidated financial statements.

In September 2015, the FASB issued Accounting Standards Update 2015-16, Business Combinations - Simplifying the Accounting for Measurement-Period Adjustments. This update requires 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, including the cumulative effect of the change in the provisional amount as if the accounting had been completed at the acquisition date. This guidance was effective for the Company as of March 1, 2016. The Company does not anticipate this guidance will have any impact on its consolidated financial statements as the purchase price allocations of the Company's recent business combinations have been finalized.

In February 2016, the FASB issued Accounting Standards Update 2016-02, Leases (Topic 842). This update requires lessees to recognize, on the balance sheet, assets and liabilities for the rights and obligations created by leases of greater than twelve months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. This guidance will be effective for the Company as of March 1, 2019. A modified retrospective transition method is required. The Company is currently evaluating the impact the adoption of this guidance will have on its consolidated financial statements.