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. The following table sets forth deferred revenue (revenues received but unearned) and deferred contracts costs on the Consolidated Balance Sheets at December 31 (in millions):



	Balance Sheet Classification	2016		2015
Deferred revenue ⁽¹⁾
Current	Deferred Revenue	$	103.9	$	33.1
Noncurrent	Other Liabilities	10.5		17.7
		$	114.4	$	50.8

Deferred contract costs
Current	Prepaid Expenses and Other Current Assets	$	2.0	$	3.2
Noncurrent	Other Assets	0.2		1.2
		$	2.2	$	4.4

(1) 2016 Deferred revenue includes $95.9 million ($86.5 million and $9.4 million, current and noncurrent, respectively) related to the Cobalt contract amendment (see Note 1).

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's accounts receivable is stated at historical carrying value net of write-offs 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. Any allowance is based on historical and other factors that predict collectability, including write-offs, recoveries and the evaluation and monitoring of credit quality. No allowance for doubtful accounts was required at December 31, 2016 or 2015.

The following table sets forth the components of Receivables - Trade and Other at December 31 (in millions):



	2016		2015
Trade	$	286.2	$	395.7
Income tax	7.7		4.5
Other	7.4		10.3
Total receivables - trade and other	$	301.3	$	410.5

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 2014, we reduced salvage values for our jack-up rigs from 20 percent to 10 percent of historical cost effective December 31, 2014, in connection with the completion of our asset impairment test. Estimated useful lives and salvage values are presented below:



	Life (in years)	Salvage Value
Jack-up drilling rigs:
Hulls	25 to 35	10	%
Legs	25 to 30	10	%
Quarters	25	10	%
Drilling equipment	2 to 25	0% to 10%

Drillships:
Hulls	35	10	%
Drilling equipment	2 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 capitalized a portion of interest cost incurred during the drillship construction period, which ended in 2015 with the completion of the drillship construction program. We capitalized interest in the amount of $16.2 million in 2015 and $57.6 million in 2014. We did not capitalize interest in 2016.

Expenditures for maintenance and repairs are charged to expense as incurred and totaled $118 million in 2016, $129 million in 2015 and $161 million in 2014.

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, capital requirements 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.

In 2016, we conducted an impairment test of our assets and determined that the carrying values for five of our jack-up drilling units aggregating $43.6 million were not recoverable and as a result, we recognized a non-cash impairment charge of $34.3 million in 2016. In 2015, we conducted an impairment test of our assets and determined that the carrying values for ten of our jack-up drilling units aggregating $457.8 million were not recoverable, and as a result, we recognized a non-cash impairment charge of $329.8 million in 2015. In 2014, we conducted an impairment test and determined that the carrying values for twelve of our jack-ups aggregating $840.8 million were not recoverable, and as a result, we recognized a non-cash impairment charge of $565.7 million in 2014. We measured fair values using the income approach described above. Our fair value estimates required us to use significant unobservable inputs, which are internally developed assumptions not observable in the market, including assumptions related to future demand for drilling services, estimated availability of rigs and future day rates, among others. The impairments recognized in 2016, 2015 and 2014 on our jack-up rigs are included in jack-up operations in the segment information in Note 13.

Additionally, in 2014, we recognized an $8.3 million non-cash 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. The impairment recognized on the Company aircraft in 2014 is included in "Unallocated costs and other" of the segment information in Note 13.

Impairment charges are included in Material Charges and Other Operating Items on the Consolidated Statements of Operations.

Share-based Compensation

We recognize compensation cost for employee share-based awards on a straight-line basis over a 36-month service period. For employees who are retirement-eligible at the grant date or who will become retirement-eligible within six months of the grant date, compensation cost is recognized over a minimum period of six months. Compensation cost for employees who become retirement eligible after six months following the grant date but before the 36-month maximum service period is amortized over the period from the grant date to the date the employee meets the retirement eligibility requirements.

Fair value of restricted shares and restricted share units awarded to employees is based on the market price of the shares 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.

Non-employee directors may annually elect to receive either deferred or non-deferred annual equity awards. Both deferred and non-deferred awards granted to non-employee directors vest at the earlier of the first anniversary of the grant date or the next annual meeting of shareholders following the grant date but deferred awards are not settled (in cash or shares at the discretion of the Compensation Committee) until the director terminates service from the Board and non-deferred awards are settled upon vesting (in shares for awards made in 2016). Compensation cost for both deferred and non-deferred awards are recognized over the service period which is up to one year. Deferred awards (“Director RSUs”) are accounted for under the liability method of accounting, the fair value is based on the market price of the underlying shares on the grant date, and compensation expense is adjusted for changes in fair value at each report date through the settlement date. Non-deferred awards (“Director RSAs”) are accounted for as equity awards and the fair value is based on the market price of the underlying shares on the grant date.

Performance-based awards consist of Performance Units (“P-Units”), in which the payment is contingent on the Company's total shareholder return relative to the selected industry peer group. Fair value of P-Units is determined using a Monte-Carlo simulation model. P-Units granted prior to 2016 are settled in cash and P-Units granted in 2016 or after may be settled in cash or shares at the Compensation Committee's discretion. All P-Units are 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 end of the performance period.

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 has not granted any SARs since 2013. The Company intends to share-settle SARs that are exercised and has therefore accounted for them as equity awards.

Foreign Currency Transactions

A substantial majority of our revenues are received in U.S. dollars, which is our functional currency. However, in certain countries in which we operate, local laws or contracts may require us to receive some payment in the local currency. We are exposed to foreign currency exchange risk to the extent the amount of our monetary assets denominated in the foreign currency differs from our obligations in that foreign currency. In order to mitigate the effect of exchange rate risk, we attempt to limit foreign currency holdings to the extent they are needed to pay liabilities in the local currency. Prior to 2016, we entered into spot purchases or short-term derivative transactions, such as forward exchange contracts, with one-month durations. We did not enter into such transactions for the purpose of speculation, trading or investing in the market and we believe that our use of forward exchange contracts has not exposed us to material credit risk or other material market risk. Although our risk policy allows us to enter into such forward exchange contracts, we do not currently anticipate entering into such transactions in the future and had no such contracts outstanding as of December 31, 2016.

At December 31, 2016 and 2015, we held Egyptian pounds in the amount of $5.1 million and $13.5 million, respectively, of which $4.2 million and $13.5 million are classified as Other Assets on the Consolidated Balance Sheets. We ceased drilling operations in Egypt in 2014, and are currently working to obtain access to the funds for use outside Egypt to the extent they are not utilized. We can provide no assurance we will be able to convert or utilize such funds in the future.

Non-U.S. dollar transaction gains and losses are recognized in “other - net” on the Consolidated Statements of Income. The Company recognized net currency exchange losses of $9.7 million, $3.9 million and $0.05 million in 2016, 2015 and 2014, respectively. In 2016, the exchange loss was primarily due to the devaluation of the Egyptian pound.

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 has not provided deferred income taxes on certain undistributed earnings of its non-U.K. subsidiaries. Generally, earnings of non-U.K. subsidiaries in which Rowan Companies Inc. (RCI) does not have a direct or indirect ownership interest can be distributed to Rowan plc without the imposition of either U.K. or local country tax. It is generally the Company’s policy and intention to permanently reinvest earnings of non-U.S. subsidiaries of RCI outside the U.S. However, we have recognized taxes related to the earnings of certain subsidiaries that are not permanently reinvested or that will not be permanently reinvested in the future. See Note 12 for further information regarding the Company’s income taxes.

Income (Loss) Per Common Share

Basic income (loss) per share is computed by dividing income (loss) 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 outstanding during the period, which includes nonvested restricted stock, restricted stock units, P-Units, share options and share appreciation rights granted under share-based compensation plans. The effect of share equivalents is not included in the computation for periods in which a net loss occurs because to do so would be anti-dilutive.

A reconciliation of income (loss) from continuing operations for basic and diluted income per share is set forth below (in millions):



	2016		2015		2014
Income (loss) from continuing operations	$	320.6	$	93.3	$	(118.9	)
Income from continuing operations allocated to non-vested share awards	1.5		—		—
Income (loss) from continuing operations available to shareholders	$	322.1	$	93.3	$	(118.9	)

A reconciliation of shares for basic and diluted income per share is set forth below (in millions):



	2016	2015	2014
Average common shares outstanding	125.3	124.5	124.1
Effect of dilutive securities - share based compensation	1.0	0.7	—
Average shares for diluted computations	126.3	125.2	124.1

Share options, share appreciation rights, nonvested restricted stock, P-Units and restricted share units granted under share-based compensation plans are anti-dilutive and excluded from diluted earnings per share when the hypothetical number of shares that could be repurchased under the treasury stock method exceeds the number of shares that can be exercised, or when the Company reports a net loss from continuing operations. Anti-dilutive shares, which could potentially dilute earnings per share in the future, are set forth below (in millions):



	2016		2015		2014
Share options and appreciation rights	$	1.6	$	1.2	$	2.2
Nonvested restricted shares and restricted share units	0.9		1.1		0.6
Total potentially dilutive shares	$	2.5	$	2.3	$	2.8

Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers (ASC 606), 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 periods beginning January 1, 2018. ASC 606 requires an entity to recognize revenue to depict the transfer of promised 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. We will adopt ASC 606, effective January 1, 2018 concurrently with ASU No. 2016-02, Leases (ASC 842) as discussed below. We are currently evaluating the impact ASC 606 will have on our consolidated financial statements and to complete that evaluation, we have completed training on the ASU, formed an implementation team and have started the review and documentation of contracts.

In November 2015, the FASB issued ASU No. 2015-17, Balance Sheet Classification of Deferred Taxes, which requires entities to present deferred tax assets and deferred tax liabilities in balance sheets as noncurrent. We will be required to adopt the new standard in annual and interim periods beginning January 1, 2017. The amendments in this ASU may be applied either prospectively to all deferred tax liabilities and assets or retrospectively to all periods presented. In order to simplify accounting for deferred tax assets and liabilities, the Company has adopted the accounting standard in the beginning of the fourth quarter of fiscal 2016. The change in accounting standard has been applied retrospectively with no impact to the prior period consolidated financial statements.

In February 2016, the FASB issued ASU No. 2016-02, Leases (ASC 842): Amendments to the FASB Accounting Standards Codification, which requires an entity to recognize lease assets and lease liabilities on the balance sheet and to disclose key qualitative and quantitative information about the entity's leasing arrangements. Lessees and lessors will be required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach, including a number of optional practical expedients that entities may elect to apply. ASC 842 is effective for annual and interim periods beginning after December 15, 2018, with early adoption permitted. Under the updated accounting standards, we have preliminarily determined that our drilling contracts contain a lease component, and our adoption, therefore, will require that we separately recognize revenues associated with the lease and services components. Our adoption, and the ultimate effect on our consolidated financial statements, will be based on an evaluation of the contract-specific facts and circumstances, and such effect could result in differences in the timing of our revenue recognition relative to current accounting standards. Due to the interaction with the issued accounting standard on revenue recognition, we expect to adopt ASC 842 effective January 1, 2018 concurrently with ASC 606. Our adoption will have an impact on how our consolidated balance sheets, statements of income, cash flows and on the disclosures contained in our notes to consolidated financial statements will be presented. We are currently evaluating the impact ASC 842 will have on our consolidated financial statements and to complete that evaluation, we have completed training on the ASU, formed an implementation team and have started the review and documentation of contracts.

In March 2016, the FASB issued ASU No. 2016-09, Improvements to Employee Share-based Payment Accounting, which simplifies several aspects of accounting for employee share-based payment awards, including the accounting for income taxes, withholding taxes and forfeitures, as well as classification on the statement of cash flows. We will adopt this ASU as of January 1, 2017 and we expect that its impact will not be material to our consolidated financial statements and disclosures.

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which amends the FASB's guidance on the impairment of financial instruments. The ASU adds to US GAAP an impairment model that is based on expected losses rather than incurred losses. Under the new guidance, an entity recognizes as an allowance its estimate of expected credit losses. We will be required to adopt the amended guidance in annual and interim reports beginning January 1, 2020, with early adoption permitted for fiscal years beginning after December 15, 2018. We are in the process of evaluating the impact this amendment will have on our consolidated financial statements.

In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments, which provides guidance on eight cash flow classification issues with the objective of reducing differences in practice. We will be required to adopt the amendments in this ASU in annual and interim periods beginning January 1, 2018, with early adoption permitted. Adoption is required to be on a retrospective basis, unless impracticable for any of the amendments, in which case a prospective application is permitted. We are in the process of evaluating the impact these amendments will have on our consolidated financial statements.

In October 2016, the FASB issued ASU 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other than Inventory, which eliminates the exception that prohibits the recognition of current and deferred income tax effects for intra-entity transfers of assets other than inventory until the asset has been sold to an outside party. We will be required to adopt the amendments in this ASU in the annual and interim periods beginning January 1, 2018, with early adoption permitted at the beginning of an annual reporting period for which financial statements (interim or annual) have not been issued or made available for issuance. The application of the amendments will require the use of a modified retrospective basis through a cumulative-effect adjustment to retained earnings as of the beginning of the period of adoption. We are evaluating the standard for potential early adoption in our first quarter of 2017 and estimate a $205 - $211 million increase to retained earnings for the remaining unamortized deferred tax liability resulting from intra-entity transactions.

In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business, which clarifies 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. We will be required to adopt the amendments in this ASU in annual and interim periods beginning January 1, 2018, with early adoption permitted. Adoption is required to be applied on a prospective basis on or after the effective date. We are in the process of evaluating the impact these amendments will have on our consolidated financial statements.