Revenue Recognition

Background

In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers: Topic 606.” This ASU replaces nearly all existing U.S. GAAP guidance on revenue recognition. The standard prescribes a five-step model for recognizing revenue, the application of which may require significant judgment. The new guidance requires PPG to evaluate the transfer of promised goods or services to customers and recognize revenue in an amount that reflects the consideration which the Company expects to be entitled to receive in exchange for those goods and services.

The Company recognizes revenue when control of the promised goods or services is transferred to the customer and in amounts that the Company expects to collect. The timing of revenue recognition takes into consideration the various shipping terms applicable to the Company’s sales. For most transactions, control passes in accordance with agreed upon delivery terms. This approach is consistent with the Company’s historical revenue recognition methodology.

The Company delivers products to company-owned stores, home centers and other regional or national consumer retail outlets, paint dealers, concessionaires and independent distributors, company-owned distribution networks, and directly to manufacturing companies and retail customers. Each product delivered to a third party customer is considered to satisfy a performance obligation. Performance obligations generally occur at a point in time and are satisfied when control of the goods passes to the customer. The Company is entitled to collection of the sales price under normal credit terms in the regions in which it operates. Accounts receivable are recognized when there is an unconditional right to consideration. Payment terms vary from customer to customer, depending on creditworthiness, prior payment history and other considerations.

The Company also provides services by applying coatings to customers' manufactured parts and assembled products and by providing technical support to certain customers. Performance obligations are satisfied over time as critical milestones are met and as services are provided. PPG is entitled to payment as the services are rendered. For the years ended December 31, 2018 and 2017, service revenue constituted approximately 5% of total revenue.

Net sales by segment and region for the years ended December 31, 2018, 2017 and 2016 were as follows:



	Performance Coatings						Industrial Coatings						Total Net Sales
($ in millions)	2018		2017		2016		2018		2017		2016		2018		2017		2016
United States and Canada		$4,062		$4,031		$4,055		$2,423		$2,276		$2,199		$6,485		$6,307		$6,254
EMEA	2,936		2,761		2,619		1,742		1,628		1,545		4,678		4,389		4,164
Asia Pacific	1,071		970		959		1,547		1,553		1,472		2,618		2,523		2,431
Latin America	1,018		968		947		575		561		474		1,593		1,529		1,421
Total		$9,087		$8,730		$8,580		$6,287		$6,018		$5,690		$15,374		$14,748		$14,270

The Company adopted the ASU using the modified retrospective approach which required the financial statements to reflect the new standard as of January 1, 2018, and as a result, contracts that ended prior to January 1, 2018 were not included within the Company’s assessment. Accordingly, the amounts in the comparative consolidated statements of income and consolidated balance sheet have not been adjusted for the adoption of this standard. The ASU also provided additional clarity that resulted in reclassifications to or from Net sales, Cost of sales, exclusive of depreciation and amortization, Selling, general and administrative and Other income. Certain costs historically reported in Selling, general and administrative costs will now be recorded in Cost of sales, exclusive of depreciation and amortization in the consolidated statement of income, as they represent costs incurred in satisfaction of performance obligations. In addition, the cost of certain customer incentives are now recorded as a reduction of Net sales rather than Cost of sales, exclusive of depreciation and amortization or Selling, general and administrative costs.

The following table summarizes the impact of the adoption of this ASU on the consolidated statement of income for the year ended December 31, 2018:



	Year Ended December 31, 2018
($ in millions)	Without adoption			Adjustments			As Reported
Net sales		$15,399			($25	)		$15,374
Cost of sales, exclusive of depreciation and amortization		$8,925			$76			$9,001
Selling, general and administrative		$3,682			($109	)		$3,573
Other income		($122	)		$8			($114	)
Income before income taxes		$1,693			$—			$1,693