REVENUES

Adoption of Topic 606, Revenue from Contracts with Customers

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606) ("Topic 606"). ASU No. 2014-09, along with various amendments that comprise Topic 606, provide a single model for use in accounting for revenue from contracts with customers and supersedes the previous revenue recognition guidance, including certain industry-specific and transaction-specific guidance. The core principle of Topic 606 is that revenue should be recognized 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 and services.

The Company adopted Topic 606 on June 1, 2018 and elected to apply Topic 606 using the modified retrospective method. The Company determined that the adoption of Topic 606 had the following impact: (i) a deferral of certain revenue associated with the Company's book fairs incentive program (reflected in Deferred revenue), (ii) recognition of a refund liability (recorded as an increase to Other accrued expenses) and a return asset (recorded as an increase to Prepaid expenses and other current assets) for the right to recover products from customers upon settling the refund liability based on expected returns and (iii) recognition of previously capitalized direct response advertising costs as incurred, primarily related to the classroom magazines business.

Updates to Significant Accounting Policies

The Company updated its significant accounting policies as a result of the adoption of Topic 606 as follows:

Revenue Recognition - School-Based Book Fairs

Revenues associated with school-based book fairs relate to the sale of children's books and other products to book fair sponsors. In addition, the Company employs an incentive program to encourage the sponsorship of book fairs and increase the number of fairs held each school year. The Company identifies two performance obligations within its school-based book fair contracts which include the fulfillment of book fairs product and the fulfillment of product upon the redemption of incentive program credits by customers. The Company allocates the transaction price to each performance obligation and recognizes revenue at a point in time. The Company utilizes certain estimates based on historical experience and future expectations related to the participation in the incentive program and redemption patterns to determine the relative fair value of each performance obligation when allocating the transaction price. Changes in these estimates could impact the timing of the recognition of revenue. Revenue allocated to the book fair product will be recognized at the point at which product is delivered to the customer and control is transferred. The revenue allocated to the incentive program credits is recognized upon redemption of incentive credits and the transfer of control of the redeemed product. Incentive credits are generally redeemed within 12 months of issuance. Payment for school-based book fairs product is due at the completion of a customer's fair. The sale of school-based book fair product contains a right of return.

Estimated Returns

For sales that include a right of return, which primarily include the Trade and school-based book fairs channels, the Company will estimate the transaction price and record revenues as variable consideration based on the amounts the Company expects to ultimately be entitled. In order to determine estimated returns, the Company utilizes historical return rates, sales patterns, types of products and expectations and recognizes a reduction to Revenue and Cost of goods sold. In addition, a refund liability is recorded within Other accrued expenses for the consideration to which the Company believes it will not ultimately be entitled and a return asset is recorded within Prepaid expenses and other current assets for the expected inventory to be returned.

Transition

The Company has elected to present sales and other related taxes on a net basis, excluded from revenues, and as such, these are included within Other accrued expenses until remitted to taxing authorities. Shipping and handling costs that are billed to customers are included in Revenues, with costs recorded in Cost of goods sold.

The Company applied Topic 606 to all contracts as of the date of initial adoption, June 1, 2018. The cumulative effect of adopting Topic 606 was a $46.5 decrease to the opening balance of Retained earnings as of June 1, 2018.

The cumulative effect of the changes made to the Company’s condensed consolidated balance sheet at June 1, 2018 are as follows:



	As reported - May 31, 2018		Adjustments due to adoption				June 1, 2018
Accounts receivable, net	$	204.9	$	31.1		⁽¹⁾	$	236.0
Inventories, net	294.9		(1.9		)	⁽²⁾	293.0
Prepaid expenses and other current assets	66.6		(4.3		)	⁽²⁾	62.3
Noncurrent deferred income taxes	25.2		16.0			⁽³⁾	41.2
Deferred revenue	24.7		86.3			⁽⁴⁾	111.0
Other accrued expenses	177.9		1.1			⁽⁵⁾	179.0
Retained earnings	$	1,065.2	$	(46.5	)		$	1,018.7

(1) - Primarily represents the reclassification of the Company’s accounting for estimated returns from a reduction to Accounts receivable, net, to a current liability within Other accrued expenses.

(2) - Primarily represents the adjustment for previously capitalized direct response advertising costs of $5.5 and the reclassification of a return asset from Inventory to Prepaid expenses and other current assets.

(3) - Represents the income tax impact of Topic 606 adjustments.

(4) - Represents the deferred revenue related to outstanding book fairs incentive credits as of June 1, 2018.

(5) - Represents a reduction to Other accrued expenses of $27.2 for outstanding book fair incentive credits as of June 1, 2018. This decrease was offset by a $28.3 increase for estimated returns recorded to Other accrued expenses.

Application of Topic 606 to the Current Fiscal Year Quarter

The comparative prior fiscal period information continues to be reported under the accounting standards in effect during those fiscal periods. The following table illustrates the amounts by which each summarized income statement line item was affected by the adoption of Topic 606:



	Three months ended August 31, 2018
	As reported			Adjustments				Without adoption of Topic 606
Revenues	$	218.4		$	(12.5	)	⁽¹⁾	$	205.9
Cost of goods sold	125.3			(4.1		)	⁽¹⁾	121.2
Selling, general and administrative expenses	163.7			(3.2		)	⁽²⁾	160.5
Depreciation and amortization	13.2			—				13.2
Operating income (loss)	(83.8		)	(5.2		)		(89.0		)
Interest income (expense), net	0.8			—				0.8
Other components of net periodic benefit (cost)	(0.4		)	—				(0.4		)
Provision (benefit) for income taxes	(22.1		)	(1.4		)	⁽³⁾	(23.5		)
Net income (loss)	$	(61.3	)	$	(3.8	)		$	(65.1	)
Basic earnings (loss) per share:	$	(1.75	)	$	(0.11	)		$	(1.86	)
Diluted earnings (loss) per share:	$	(1.75	)	$	(0.11	)		$	(1.86	)

(1) - Represents incremental revenue and cost of goods sold related to the redemption of book fairs incentive program credits, partially offset by additional deferred revenue on incentive credits awarded during the period.

(2) - Represents direct response advertising costs being expensed as incurred.

(3) - Represents the income tax impact of Topic 606 adjustments.

Estimated Returns

As of August 31, 2018, a liability for expected returns of $45.4 is recorded within Other accrued expenses on the Company's condensed consolidated balance sheets. In addition, as of August 31, 2018, a return asset of $3.5 is recorded within Prepaid expenses and other current assets for the recoverable cost of product estimated to be returned by customers.

Deferred Revenue

The Company's contract liabilities consist of advance billings and payments received from customers in excess of revenue recognized and revenue allocated to outstanding book fairs incentive credits. These liabilities are recorded within Deferred revenue on the Company's condensed consolidated balance sheets and are classified as short term as substantially all of the associated performance obligations are expected to be satisfied, and related revenue recognized, within one year. The amount of revenue recognized in the three months ended August 31, 2018 included within the opening deferred revenue balance was $31.9.

Disaggregated Revenue Data

The following table presents the Company’s revenues disaggregated by region and channel:



	Three months ended August 31,
	2018		2017
Book Clubs	$	9.1	$	8.0
Book Fairs	25.2		12.1
Trade	59.0		46.7
Total Children's Book Publishing & Distribution	93.3		66.8

Education	50.3		45.0

Major Markets ⁽¹⁾	50.3		51.7
Other Markets⁽²⁾	24.5		25.7
Total International	74.8		77.4
Total Revenues	$	218.4	$	189.2

(1) - Includes Canada, UK, Australia and New Zealand.

(2) - Primarily includes markets in Asia.