|IHS MARKIT LTD. filed this Form 10-K on 01/18/2019|
Historically, our judgments and estimates have been reasonably accurate, as we have not experienced significant disputes with our customers regarding the timing and acceptance of delivered products and services. However, our actual experience in future periods with respect to binding terms and conditions and customer acceptance may differ from our historical experience.
In the first quarter of 2019, we will adopt Accounting Standards Update (“ASU”) 2014-09, 2016-08, 2016-10, and 2016-12. These standards establish a comprehensive new revenue recognition model designed to depict the transfer of goods or services to a customer in an amount that reflects the consideration the entity expects to receive in exchange for those goods or services. We will adopt the new revenue guidance using the modified retrospective transition method, which results in a cumulative effect adjustment to the opening balance of retained earnings as of the date of adoption. We currently estimate an increase of approximately $50 million to the opening balance of retained earnings for this transition for the change in revenue recognition, primarily related to the change in accounting for the license rights associated with certain term-based software license arrangements, which were historically recognized over the term of the contract, but will now be recognized at contract inception based on estimated stand-alone selling price.
The expected $50 million transition adjustment pertains solely to the impact to retained earnings as of December 1, 2018 on our consolidated balance sheet, and is not indicative of the impact the new standards are expected to have on our future consolidated financial statements. We do not believe that implementation of the new standards will have a significant impact on our annual results of operations, although we anticipate that there may be more quarterly fluctuations in revenue due to the change in accounting treatment for our term-based software license arrangements. We do not expect that application of the new guidance will affect our cash flows or the economics of our business.
Business Combinations. We apply the purchase method of accounting to our business combinations. All of the assets acquired, liabilities assumed, and contingent consideration are allocated based on their estimated fair values. Fair value determinations involve significant estimates and assumptions about several highly subjective variables, including future cash flows, discount rates, and expected business performance. There are also different valuation models and inputs for each component, the selection of which requires considerable judgment. Our estimates and assumptions may be based, in part, on the availability of listed market prices or other transparent market data. These determinations will affect the amount of amortization expense recognized in future periods. We base our fair value estimates on assumptions we believe are reasonable, but recognize that the assumptions are inherently uncertain. Depending on the size of the purchase price of a particular acquisition, the mix of intangible assets acquired, and expected business performance, the purchase price allocation could be materially impacted by applying a different set of assumptions and estimates. In 2018, 2017, and 2016, we recorded approximately $745.3 million, $113.8 million, and $3.6 billion, respectively, of intangible assets associated with business combinations.
The structure of certain business combinations may also require the application of significant assumptions and estimates. For example, in 2017, we acquired 78 percent of aM; in exchange for the remaining 22 percent, we issued equity interests in aM’s immediate parent holding company to aM’s founders and certain employees. We will pay cash to acquire these interests over the five years post-acquisition based on put/call provisions that tie the valuation to the underlying adjusted EBITDA performance of aM. Since the purchase of the remaining 22 percent of the business requires continued service of the founders and employees, we are accounting for the arrangement as compensation expense that is remeasured based on changes in the fair value of the equity interests. We had preliminarily estimated a range of $200 million to $225 million of unrecognized compensation expense related to this transaction, to be recognized over a weighted-average remaining recognition period of approximately 4 years. In the third quarter of 2018, upon reassessment of near-term financial expectations and their impact on the earn-out calculations, we reduced our estimated compensation expense range to $150.0 million to $175.0 million, to be recognized over a weighted-average recognition period of approximately 3.5 years. This change did not significantly impact 2018 expense. This arrangement requires the use of a number of significant judgments and estimates, including the expected put/call exercise pattern and the expected value of the cash payout at the time of exercise.
Goodwill and Other Intangible Assets. We make various assumptions about our goodwill and other intangible assets, including their estimated useful lives and whether any potential impairment events have occurred. We perform impairment analyses on the carrying values of goodwill and other intangible assets at least annually. Additionally, we review the carrying value of goodwill and other intangible assets whenever events or changes in circumstances indicate that their carrying amounts may not be recoverable. Examples of such events or changes in circumstances, many of which are subjective in nature, include the following:
•Significant negative industry or economic trends;
•A significant change in the manner of our use of the acquired assets or our strategy;
•A significant decrease in the market value of the asset;
•A significant change in legal factors or in the business climate that could affect the value of the asset; and