SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Use of Estimates

The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Revenue and Expense Recognition

Our drilling contracts generally provide for payment on a daily rate basis, and revenues are recognized as the work progresses with the passage of time. We occasionally receive lump-sum payments at the outset of a drilling assignment for equipment moves or modifications. Lump-sum fees received for equipment moves (and related costs) and fees received for equipment modifications or upgrades are initially deferred and amortized on a straight-line basis over the primary term of the drilling contract. The costs of contractual equipment modifications or upgrades and the costs of the initial move of newly acquired rigs are capitalized and depreciated in accordance with the Company’s fixed asset capitalization policy. The costs of moving equipment while not under contract are expensed as incurred. Revenues received but unearned are included in current and long-term liabilities and totaled $60.2 million and $81.8 million at December 31, 2014 and 2013, respectively. Deferred contract costs are included in prepaid expenses and other assets and totaled $5.4 million and $19.8 million at December 31, 2014 and 2013, respectively.

We recognize revenue for certain reimbursable costs. Each reimbursable item and amount is stipulated in the Company’s contract with the customer, and such items and amounts frequently vary between contracts. We recognize reimbursable costs on the gross basis, as both revenues and expenses, because we are the primary obligor in the arrangement, have discretion in supplier selection, are involved in determining product or service specifications and assume full credit risk related to the reimbursable costs.

Cash Equivalents

Cash equivalents consist of highly liquid temporary cash investments with maturities no greater than three months at the time of purchase.

Accounts Receivable and Allowance for Doubtful Accounts

The Company assesses the collectability of receivables and records adjustments to an allowance for doubtful accounts, which is recorded as an offset to accounts receivable, to cover the risk of credit losses. The allowance is based on historical and other factors that predict collectability, including write-offs, recoveries and the monitoring of credit quality. No allowance for doubtful accounts was required at December 31, 2014 or 2013.

The following table sets forth the components of Receivables - trade and other at December 31 (in thousands):



	2014		2013
Trade	$	524,712	$	323,679
Income tax	6,315		6,759
Other	14,177		14,108
Total receivables - trade and other	$	545,204	$	344,546

Property and Depreciation

We provide depreciation for financial reporting purposes under the straight-line method over the asset’s estimated useful life from the date the asset is placed into service until it is sold or becomes fully depreciated. In connection with the completion of the asset impairment test in 2014, we reduced salvage values for our jack-up rigs from 20 percent to 10 percent of historical cost effective December 31, 2014. Estimated useful lives and salvage values are presented below:



	Life (in years)	Salvage Value
Jack-up drilling rigs:
Hulls	35	10	%
Legs	30	10	%
Quarters	25	10	%
Drilling equipment	5 to 25	0% to 10%

Drillships:
Hull	35	10	%
Drilling equipment	5 to 25	0% to 10%

Drill pipe and tubular equipment	4	10	%
Other property and equipment	3 to 30	various

Expenditures for new property or enhancements to existing property are capitalized and depreciated over the asset’s estimated useful life. As assets are sold or retired, property cost and related accumulated depreciation are removed from the accounts, and any resulting gain or loss is included in results of operations. The Company capitalizes a portion of interest cost incurred during the construction period. We capitalized interest in the amount of $57.6 million in 2014, $48.7 million in 2013 and $33.4 million in 2012.

Expenditures for maintenance and repairs are charged to operations as incurred and totaled $161 million in 2014, $152 million in 2013 and $132 million in 2012.

Impairment of Long-lived Assets

We review the carrying values of long-lived assets for impairment whenever events or changes in circumstances indicate their carrying amounts may not be recoverable. For assets held and used, we determine recoverability by evaluating the undiscounted estimated future net cash flows based on projected day rates, operating costs and utilization of the asset under review. When the impairment of an asset is indicated, we measure the amount of impairment as the amount by which the asset’s carrying amount exceeds its estimated fair value. We measure fair value by estimating discounted future net cash flows under various operating scenarios (an income approach) and by assigning probabilities to each scenario in order to determine an expected value. The lowest level of inputs we use to value assets held and used in the business are categorized as “significant unobservable inputs,” which are Level 3 inputs in the fair value hierarchy. For assets held for sale, we measure fair value based on equipment broker quotes, less anticipated selling costs, which are considered Level 3 inputs in the fair value hierarchy.

Due to a number of factors including the rapid and dramatic fall in worldwide oil prices in the last half of 2014 and decline in the Company's stock price; the expected delivery of a large number of newbuild jack-up drilling units over the next few years; and the finalization of the Company's 2015 operating budget, among others, we conducted an impairment test of our assets and determined that the carrying values of our twelve oldest jack-up drilling units aggregating $840.8 million were not recoverable from their undiscounted cash flows and exceeded the rigs' estimated fair values. As a result, we recognized a noncash impairment charge of $565.7 million in the fourth quarter of 2014. We measured fair value using the income approach described above. Our estimate of fair value required us to use significant unobservable inputs including assumptions related to future demand for drilling services, supply of available rigs and day rates, among others.

Also in 2014, we recognized an $8.3 million impairment charge for the carrying value of a Company aircraft, which was used to support operations. We sold the aircraft later in 2014 and recognized an immaterial loss on sale. The asset had a carrying value of $12.7 million prior to the write-down. The amount of the impairment was based on actual sales prices for similar equipment obtained from a third-party dealer of such equipment. Quoted prices in active markets for similar equipment are considered a Level 2 input in the fair value hierarchy.

In 2013 we recognized a $4.5 million impairment charge for a dock and storage facility, which had a carrying value of $23.5 million prior to the write-down.

In 2012 we recognized a $5.2 million impairment charge for the Rowan Juneau, which had a carrying value of $18.7 million prior to the write-down.

Impairment charges are included in material charges and other operating expenses on the Consolidated Statements of Income.

Share-based Compensation

We recognize compensation cost for share-based awards on a straight-line basis over the requisite service period of the award. Compensation cost of awards granted beginning March 2013 that have retirement-eligibility provisions is recognized over the lessor of six months or the period from the grant date to the date the employee meets the retirement eligibility and certain other requirements.

Fair value of restricted shares and restricted share units awarded to employees is based on the market price of the stock on the date of grant. Compensation cost is recognized for awards that are expected to vest and is adjusted in subsequent periods if actual forfeitures differ from estimates.

Restricted share units granted to non-employee directors ("Director RSUs") vest one year following the grant date but may not be settled until the director terminates service from the board. Compensation cost is recognized over the one-year service period. Director RSUs may be settled in cash and/or shares of stock and are accounted for under the liability method of accounting. Fair value is based on the market price of the underlying stock on the grant date and compensation expense is adjusted for changes in fair value at each report date through the settlement date.

Performance-based awards consist of Performance Units, in which the payment is contingent on the Company's total shareholder return relative to an industry peer group. Fair value of Performance Units is determined using a Monte-Carlo simulation model. Performance Units are settled in cash and accounted for under the liability method of accounting. Compensation cost is recognized on a straight-line basis over the service period and is adjusted for changes in fair value at each report date through the vest date.

Fair value of share appreciation rights ("SARs") is determined using the Black-Scholes option pricing model. The Company uses the simplified method for determining the expected life of SARs, because it does not have sufficient historical exercise data to provide a reasonable basis on which to estimate expected term, as permitted under US GAAP. The Company intends to share-settle SARs that are exercised and has therefore accounted for them as equity awards.

Foreign Currency Transactions

The U.S. dollar is the functional currency for all of our operations. Non-U.S. dollar transaction gains and losses are recognized in “other income” on the Consolidated Statements of Income. In order to reduce the impact of exchange rate fluctuations, we generally require customer payments to be in U.S. dollars and try to limit local currency holdings to the extent they are needed to pay liabilities denominated in local currencies. In certain countries in which we operate, local laws or contracts may require us to receive payment in the local currency. In such instances, we may be exposed to devaluation and other risk of exchange loss. In the event we terminate operations in such countries we may not be able to utilize or convert such funds to another currency for future use. In 2014 we terminated operations in Egypt, where we held approximately $16.3 million in Egyptian pounds, based on exchange rates in effect at December 31, 2014. Such amount was reclassified to noncurrent assets as of that date. We can provide no assurance we will be able to utilize or repatriate such funds in the future.

The Company recognized a net currency exchange gain of $0.05 million in 2014, a net exchange loss of $2.3 million in 2013 and a net exchange gain of $0.5 million in 2012.

Income Taxes

Rowan recognizes deferred income tax assets and liabilities for the estimated future tax consequences of differences between the financial statement and tax bases of assets and liabilities. Valuation allowances are provided against deferred tax assets that are not likely to be realized. Interest and penalties related to income taxes are included in income tax expense.

The Company does not provide deferred income taxes on undistributed earnings of its non-U.K. subsidiaries, including RCI’s non-U.S. subsidiaries. It is the Company’s policy and intention to permanently reinvest earnings of non-U.S. subsidiaries of RCI outside the U.S. Should the non-U.S. subsidiaries of RCI make a distribution from these earnings, we may be subject to additional U.S. income taxes. Generally, earnings of non-U.K. subsidiaries in which RCI does not have a direct or indirect ownership interest can be distributed to the Company without the imposition of either U.K. or local country tax. See Note 11 for further information regarding the Company’s income taxes.

Income Per Common Share

Basic income per share is computed by dividing income available to common shareholders by the weighted-average number of common shares outstanding during the period. Diluted income per share includes the additional effect of all potentially dilutive securities, which includes nonvested restricted stock and units and dilutive share options and appreciation rights granted under share-based compensation plans. Dilutive securities are not included in the computation of loss per share when the Company reports a net loss from continuing operations as the impact would be antidilutive.

A reconciliation of shares for basic and diluted income per share is set forth below. There were no income adjustments to the numerators of the basic or diluted computations for the periods presented (in thousands):



	2014	2013	2012
Average common shares outstanding	124,067	123,517	122,998
Add dilutive securities:
Nonvested restricted shares and restricted share units	—	542	457
Share options and appreciation rights	—	409	417
Average shares for diluted computations	124,067	124,468	123,872

Share options and appreciation rights are antidilutive and excluded from diluted earnings per share when their exercise or strike price exceeds the average market price during the period, or when the Company reports a net loss from continuing operations. The following table sets forth antidilutive shares excluded from diluted earnings per share. Such securities could potentially dilute earnings per share in the future (in thousands):



	2014	2013	2012
Share options and appreciation rights	2,234	1,065	658
Nonvested restricted shares and restricted share units	619	—	—
Total potentially dilutive shares	2,853	1,065	658

Recent Accounting Pronouncements

In April 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update No. 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity ("ASU 2014-08"), which limits discontinued operations reporting to disposals of components of an entity that represent strategic shifts that have (or will have) a major effect on an entity's operations and financial results. Under current guidelines prior to the effective date of ASU 2014-08, many disposals that were routine in nature and not a change in an entity's strategy were reported in discontinued operations. The provisions of the new standard will apply to disposals (or classifications as held for sale) of components of an entity occurring in annual and interim periods beginning in 2015. We do not expect adoption of the standard will have a material effect on our financial statements or the notes thereto.

In May 2014, the Financial Accounting Standards Board issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers, which sets forth a global standard for revenue recognition and replaces most existing industry-specific guidance. We will be required to adopt the new standard in annual and interim reports for periods beginning January 1, 2017. We are currently evaluating the potential effect of the new guidance.