Significant Accounting Policies

6 Months Ended

Jun. 30, 2018

During the first quarter of 2018, the Company adopted new accounting guidance related to revenue recognition, accounting for business combinations, income taxes and investments, each of which is described below. There have been no other significant changes in the Company’s accounting policies during the three and six months ended June 30, 2018 as compared to the significant accounting policies described in its Annual Report on Form 10-K for the year ended December 31, 2017.

Recent Accounting Pronouncements

Revenue Recognition

In May 2014, the Financial Accounting Standards Board issued an accounting standard update ("ASC 606") on revenue recognition. The new guidance creates a single, principle-based model for revenue recognition that expands and improves disclosures about revenue. On January 1, 2018, the Company adopted the accounting standard update for revenue from contracts with customers on a modified retrospective basis, applying the practical expedient to all contracts that the Company had not completed as of January 1, 2018. The Company elected the modified retrospective method of adoption; and consequently, results for reporting periods beginning after January 1, 2018 are presented under the new revenue standard, while prior period amounts are not adjusted and continue to be reported under the revenue accounting literature in effect during those periods. The Company recorded a net increase to retained earnings of $130.7 million as of January 1, 2018 as a result of the transition, with the impact primarily related to the cumulative effect of a decrease in deferred revenue from the upfront recognition of term licenses and the general requirement to allocate the transaction price on a relative stand-alone selling price of $99.9 million, and an increase in contract assets of $7.3 million, the cumulative effect of a decrease in commission expense of $66.4 million, partially offset by an increase from the cumulative effect of the impact on deferred income taxes of $42.9 million.

The impact of adoption of ASC 606 to the Company’s condensed consolidated statements of income and balance sheets are as follows:



	Three Months Ended June 30, 2018
	As Reported		Balances without adoption of ASC 606		Effect of Change Higher/(Lower)
	(in thousands, except per share amounts)
Total net revenues	$	742,365	$	741,920	$	445
Total cost of net revenues	108,749		107,807		942
Gross profit	633,616		634,113		(497		)
Total operating expenses	488,469		499,047		(10,578		)
Income from operations	145,147		135,066		10,081
Net income	$	106,833	$	99,295	$	7,538

Basic earnings per share	$	0.79	$	0.73	$	0.06
Diluted earnings per share	$	0.73	$	0.68	$	0.05



	Six Months Ended June 30, 2018
	As Reported		Balances without adoption of ASC 606		Effect of Change Higher/(Lower)
	(in thousands, except per share amounts)
Total net revenues	$	1,439,557	$	1,449,244	$	(9,687	)
Total cost of net revenues	217,035		215,933		1,102
Gross profit	1,222,522		1,233,311		(10,789		)
Total operating expenses	911,812		925,731		(13,919		)
Income from operations	310,710		307,580		3,130
Net income	$	251,092	$	250,197	$	895

Basic earnings per share	$	1.82	$	1.82	$	—
Diluted earnings per share	$	1.72	$	1.72	$	—



	As of June 30, 2018
	As Reported		Balances without adoption of ASC 606		Effect of Change Higher/(Lower)
	(in thousands)
Prepaid and other current assets ⁽¹⁾	$	208,648	$	186,538	$	22,110
Other assets ⁽²⁾	104,015		42,323		61,692
Deferred tax assets, net	119,760		150,444		(30,684		)
Total assets	$	5,366,062	$	5,312,944	$	53,118

Other liabilities ⁽³⁾	143,677		130,617		13,060
Current portion of deferred revenues	1,243,032		1,290,041		(47,009		)
Long-term portion of deferred revenues	480,942		525,160		(44,218		)
Total liabilities	$	4,701,805	$	4,779,972	$	(78,167	)

Stockholders' Equity:
Retained earnings	$	3,893,354	$	3,762,069	$	131,285

(1) As reported primarily includes contract acquisition costs of $35.0 million. The balance without adoption of ASC 606 includes contract acquisition costs of $14.2 million.

(2) As reported primarily includes contract acquisition costs of $59.5 million.

(3) As reported includes deferred tax liabilities of $62.8 million. The balance without ASC 606 includes deferred tax liabilities

of $49.7 million.

Adoption of the standard had no impact to cash from or used in operating, financing, or investing activities on the Company’s condensed consolidated cash flows statements.

Accounting for Business Combinations

In January 2017, the Financial Accounting Standards Board issued an accounting standard update on the accounting for business combinations by clarifying 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. The Company adopted the standard effective January 1, 2018. The adoption of this standard had no impact on the Company's condensed consolidated financial position, results of operations and cash flows.

Accounting for Income Taxes

In October 2016, the Financial Accounting Standards Board issued an accounting standard update on the accounting for income taxes, which requires entities to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transaction occurs as opposed to deferring tax consequences and amortizing them into future periods. A modified retrospective approach with a cumulative-effect adjustment directly to retained earnings at the beginning of the period of adoption is required. The Company adopted the standard effective January 1, 2018. The adoption of this standard did not have a material impact on the Company's condensed consolidated financial position, results of operations and cash flows.

Accounting for Investments

In January 2016, the Financial Accounting Standards Board issued an accounting standard update for the recognition and measurement of financial assets and liabilities. Under the standard, equity investments that do not have readily determinable fair values and do not qualify for the net asset value practical expedient are eligible for the measurement alternative. For the Company’s equity investments in private equity securities, which do not have readily determinable fair values, the Company has elected the measurement alternative defined as cost, less impairment, plus or minus adjustments resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer. For certain of the Company’s equity investments in private equity funds, the Company has elected to use the net asset value practical expedient. The guidance of this accounting standards update was adopted effective January 1, 2018. The impact of adopting the accounting standard update was not material to the condensed consolidated financial statements.

In February 2018, the Financial Accounting Standards Board issued an accounting standard update that clarified and amended some of the updates made in the January 2016 update to the recognition and measurement of financial assets and liabilities. The Company has elected to early adopt this accounting standard update effective January 1, 2018. The impact of adopting the accounting standard update was not material to the condensed consolidated financial statements.

Leases

In February 2016, the Financial Accounting Standards Board issued an accounting standard update on the accounting for leases. The new guidance requires that lessees in a leasing arrangement recognize a right-of-use asset and a lease liability for most leases (other than leases that meet the definition of a short-term lease). The liability will be equal to the present value of lease payments. The asset will be based on the liability, subject to adjustment, such as for initial direct costs. The new guidance is effective for annual reporting periods beginning after December 15, 2018. The new standard must be adopted using a modified retrospective transition, and provides for certain practical expedients. Transition will require application of the new guidance at the beginning of the earliest comparative period presented. The Company has concluded an assessment of its systems, data and processes related to the implementation of this accounting standard. Additionally, the Company has initiated its information technology system design and solution development. The Company is currently evaluating the potential impact of this standard on its financial position and results of operations; however, it is expected to have a material impact on the Company's financial position due to the recognition of the right-of-use assets and lease liabilities for operating leases which are currently not reflected on the balance sheet. The Company does not expect a material impact to its results of operations.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and accompanying notes. Significant estimates made by management include the standalone selling price related to revenue recognition, the provision for doubtful accounts receivable, the provision to reduce obsolete or excess inventory to market, the provision for estimated returns, as well as sales allowances, the assumptions used in the valuation of stock-based awards, the assumptions used in the discounted cash flows to mark certain of its investments to market, the valuation of the Company’s goodwill, net realizable value of product related and other intangible assets, the provision for lease losses, the provision for income taxes and the amortization and depreciation periods for contract acquisition costs, intangible and long-lived assets. While the Company believes that such estimates are fair when considered in conjunction with the condensed consolidated financial position and results of operations taken as a whole, the actual amounts of such items, when known, will vary from these estimates.

Available-for-sale Investments

Short-term and long-term available-for-sale investments as of June 30, 2018 and December 31, 2017 primarily consist of agency securities, corporate securities, municipal securities and government securities. Investments classified as available-for-sale are stated at fair value with unrealized gains and losses, net of taxes, reported in Accumulated other comprehensive loss. The Company classifies its available-for-sale investments as current and non-current based on their actual remaining time to maturity. The Company does not recognize changes in the fair value of its available-for-sale investments in income unless a decline in value is considered other-than-temporary in accordance with the authoritative guidance.

The Company’s investment policy is designed to limit exposure to any one issuer depending on credit quality. The Company uses information provided by third parties to adjust the carrying value of certain of its investments to fair value at the end of each period. Fair values are based on a variety of inputs and may include interest rates, known historical trades, yield curve information, benchmark data, prepayment speeds, credit quality and broker/dealer quotes. See Note 6 for additional information regarding the Company’s investments.

Foreign Currency

The functional currency for all of the Company’s wholly-owned foreign subsidiaries is the U.S. dollar. Monetary assets and liabilities of such subsidiaries are remeasured into U.S. dollars at exchange rates in effect at the balance sheet date, and revenues and expenses are remeasured at average rates prevailing during the year. Foreign currency transaction gains and losses are the result of exchange rate changes on transactions denominated in currencies other than the functional currency, including U.S. dollars. The remeasurement of those foreign currency transactions is included in determining net income or loss for the period of exchange.

Accounting for Stock-Based Compensation Plans

The Company has various stock-based compensation plans for its employees and outside directors and accounts for stock-based compensation arrangements in accordance with the authoritative guidance, which requires the Company to measure and record compensation expense in its condensed consolidated financial statements using a fair value method. See Note 8 for further information regarding the Company’s stock-based compensation plans.

Reclassifications

Certain reclassifications of the prior years' amounts have been made to conform to the current year's presentation.

Beginning in the first quarter of fiscal year 2018, the Company revised its presentation of revenue to align with its transition to a subscription business model as follows: (1) subscription revenue, which includes revenue from the Company's cloud services offerings and on-premise subscriptions as well as revenue from its Citrix Service Provider ("CSP") offerings; (2) product and license revenue from perpetual product and license offerings; and (3) support and services revenue for perpetual product and license offerings.

This change in manner of presentation did not affect the Company's total net revenues, total cost of net revenues or gross margin. Conforming changes have been made for all periods presented, as follows (in thousands):



Three Months Ended June 30, 2017
As Previously Reported			Amount Reclassified			As Reported Herein
Revenues:						Revenues:
Software as a service	$	41,513	$	33,083		Subscription	$	74,596
Product and licenses ⁽¹⁾	211,009		(20,633		)	Product and license	190,376
License updates and maintenance ⁽²⁾	409,028		19,227			Support and services ⁽³⁾	428,255
Professional services	31,677		(31,677		)
Total net revenues	$	693,227	$	—		Total net revenues	$	693,227



Six Months Ended June 30, 2017
As Previously Reported			Amount Reclassified			As Reported Herein
Revenues:						Revenues:
Software as a service	$	80,243	$	63,443		Subscription	$	143,686
Product and licenses ⁽¹⁾	402,606		(41,331		)	Product and license	361,275
License updates and maintenance ⁽²⁾	811,783		39,160			Support and services ⁽³⁾	850,943
Professional services	61,272		(61,272		)
Total net revenues	$	1,355,904	$	—		Total net revenues	$	1,355,904


(1)	Product and licenses as previously reported included revenue from CSPs and on-premise subscriptions that are now included in Subscription. Current period presentation only includes revenues from perpetual offerings and hardware.


(2)	License updates and maintenance as previously reported included revenue from CSPs and on-premise license updates and maintenance that are now included in Subscription.


(3)	Support and services includes revenues from license updates and maintenance from perpetual offerings as well as professional services.