| Summary of Significant Accounting Policies | 1. Summary of Significant Accounting Policies
Description of Business
CRA International, Inc. (“CRA or the “Company”) is a worldwide leading consulting services firm that applies advanced analytic techniques and in‑depth industry knowledge to complex engagements for a broad range of clients. CRA offers services in two broad areas: litigation, regulatory, and financial consulting and management consulting. CRA operates in one business segment. CRA operates its business under its registered trade name, Charles River Associates.
Fiscal Year and Quarters
CRA’s fiscal year end is the Saturday nearest December 31 of each year. CRA’s fiscal years periodically contain 53 weeks rather than 52 weeks. Fiscal 2019, fiscal 2018, and fiscal 2017 were 52-week years. CRA’s fiscal quarter ends are determined as the last Saturday nearest the respective calendar quarter end.
Basis of Presentation
The Consolidated Financial Statements include the accounts of CRA International, Inc. and its majority-owned subsidiaries (collectively the ‘Company’) which require consolidation, after the elimination of intercompany accounts and transactions. In addition, as more fully explained in note 12, the consolidated financial statements include CRA’s interest in GNU123 Liquidating Corporation (‘GNU’). The Company’s fiscal year ends on the Saturday nearest to December 31. There were 52 weeks in each of the fiscal years 2019, 2018 and 2017. Certain prior year amounts have been reclassified to conform to current year presentation.
Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United State of America (“U.S. GAAP”) requires management to make significant estimates and judgments that affect the reported amounts of assets and liabilities, as well as the related disclosure of contingent assets and liabilities, at the date of the financial statements, and the reported amounts of consolidated revenues and expenses during the reporting period. Estimates in these consolidated financial statements include, but are not limited to, allowances for accounts receivable and unbilled services, revenue recognition on fixed price contracts, variable consideration to be included in the transaction price of revenue contracts, depreciation of property and equipment, measurement of operating lease right-of-use (“ROU”) assets and liabilities, share-based compensation, valuation of the contingent consideration liabilities, valuation of acquired intangible assets, impairment of long-lived assets, goodwill, accrued and deferred income taxes, valuation allowances on deferred tax assets, accrued incentive compensation, and certain other accrued expenses. These items are monitored and analyzed by CRA for changes in facts and circumstances, and material changes in these estimates could occur in the future. Changes in estimates are recorded in the period in which they become known. CRA bases its estimates on historical experience and various other assumptions that CRA believes to be reasonable under the circumstances. Actual results may differ from those estimates if CRA’s assumptions based on past experience or other assumptions do not turn out to be substantially accurate.
Cash and Cash Equivalents
As of December 28, 2019, CRA's cash accounts were concentrated at two financial institutions, which potentially exposes CRA to credit risks. The financial institutions both have short-term credit ratings of A-2 by Standard & Poor's ratings services. CRA has not experienced any losses related to such accounts. CRA does not believe that there is significant risk of non-performance by the financial institutions, and its cash on deposit is fully liquid. CRA continually monitors the credit ratings of the institutions.
Cash equivalents consist principally of money market funds with maturities of three months or less when purchased.
Foreign Currency Translation
Asset and liability accounts of CRA’s foreign subsidiaries are translated into U.S. dollars at year‑end exchange rates and operating accounts are translated at average exchange rates for each reporting period. The resulting translation adjustments are recorded in shareholders’ equity as a component of accumulated other comprehensive income (loss). Foreign currency transactions are remeasured at current exchanges rates, with adjustments recorded in the statement of operations. The effect of transaction gains and losses recorded in income before provision for income taxes amounted to losses of $1.3 million for fiscal 2019, gains of $0.4 million for fiscal 2018, and losses of $0.4 million for fiscal 2017.
Revenue Recognition and Allowances for Accounts Receivable and Unbilled Services
On December 31, 2017, CRA adopted ASC Topic 606, Revenue from Contracts with Customers (“ASC 606”) using the modified retrospective method for all contracts not completed as of the date of adoption. Under ASC 606, revenue is recognized when CRA satisfies a performance obligation by transferring services promised in a contract to a client in an amount that reflects the consideration that CRA expects to receive in exchange for those services. Performance obligations in CRA’s contracts represent distinct or separate service streams that CRA provides to clients
Revenue contracts with clients are evaluated based on the five-step model under ASC 606: (1) identify the contract with the customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to separate performance obligations; and (5) recognize revenues when (or as) each performance obligation is satisfied. If, at the outset of an arrangement, CRA determines that an enforceable contract does not exist, revenues are deferred until all criteria for an enforceable contract are met.
CRA derives substantially all of its revenues from the performance of professional services for its clients. The contracts that CRA enters into and operates under specify whether the engagement will be billed on a time‑and‑materials basis or a fixed‑price basis. These engagements generally last three to six months, although some engagements can be much longer in duration. Each contract must be approved by a vice president.
·
Time-and-materials arrangements require the client to pay based on the number of hours worked at contractually agreed-upon hourly rates. Revenues are recognized from these arrangements based on hours incurred and contracted rates based a right-to-payment for services completed to date. When a time-and-materials arrangement has a “cap” or “limit” amount, revenue is recognized up to the cap or limit amount specified by the client, based on the efforts or hours incurred and expenses incurred. Thereafter, revenue is reserved pending an amendment of the cap or limit.
·
Fixed-price arrangements require the client to pay a contractually agreed-upon fee in exchange for a pre-established set of professional services. Fees are based on estimates of the costs and timing for completing a performance obligation. Under fixed-price arrangements, revenues are generally recognized using a proportional performance method, which is based on the ratio of costs incurred to the total estimated costs for completing a performance obligation. CRA’s fixed-price arrangements generally have a single performance obligation. For arrangements that contain multiple performance obligations, the fixed price is allocated based on the estimated relative standalone selling prices of the promised services underlying each performance obligation. If the standalone selling price is not observable through past transactions, CRA estimates the standalone selling price considering all available information such as market conditions and internally approved pricing guidelines related to the performance obligations.
Variable consideration to be included in the transaction price is estimated based on the most likely amount CRA expects to be entitled to if it is probable that a significant future reversal of cumulative revenue under the contract will not occur. Estimates of variable consideration are based on historical realization rates. Revenues from CRA’s consulting services are recorded at the net transaction price, which includes estimates of variable consideration for which reserves are established. These variable consideration reserves, which are based on actual price concessions and those expected to be extended to CRA clients, are classified as reductions of accounts receivable and unbilled services. Specific reserves for accounts receivable and unbilled services are a component of variable consideration. Actual amounts of consideration ultimately received may differ from CRA’s estimates. If actual results in the future vary from its estimates, CRA adjusts these estimates, which would affect net revenue and earnings in the period such variances become known.
Reimbursable expenses, including those relating to travel, out-of-pocket expenses, outside consultants and other outside service costs, are generally included in revenues, and an equivalent amount of reimbursable expenses is included in costs of services in the period in which the expense is incurred. Sales, value add, and other taxes collected on behalf of third parties are excluded from revenue.
CRA usually issues invoices to its customers on a monthly basis, and payment is due upon receipt of the invoice. When determining the transaction price of a contract, an adjustment is made if payment from a customer occurs either significantly before or significantly after performance, resulting in a significant financing component. Applying the practical expedient in ASC 606, CRA does not assess whether a significant financing component exists if the period between when it performs its obligations under the contract and when the customer pays is one year or less. None of CRA’s contracts contained a significant financing component as of December 28, 2019 or December 29, 2018.
Differences between the timing of billing and the recognition of revenue are recognized as either unbilled services or deferred revenues in the accompanying consolidated balance sheets. Revenues recognized for services performed but not yet billed to clients are recorded as unbilled services. Client prepayments and retainers are classified as deferred revenues and recognized over future periods as earned in accordance with the applicable retention agreement.
CRA maintains accounts receivable and unbilled services allowances for estimated losses resulting from clients’ failure to make required payments. These allowances are determined for specific customer accounts and are based on the financial condition of CRA’s customer and related facts and circumstances. Expenses associated with these allowances are reported as a component of selling, general and administrative expenses.
Prior to adopting ASC Topic 606 on December 31, 2017, CRA followed the revenue recognition guidance as issued in ASC Topic 605, Revenue Recognition ("ASC 605"). Under this guidance, CRA would recognize substantially all of its revenues under written service contracts when the fee was fixed and determinable, as the services were provided, and only in those situations where collection from the client was reasonably assured. In certain cases CRA provided services to its clients without sufficient contractual documentation, or fees were tied to performance-based criteria, which required the Company to defer revenue in accordance with ASC 605. In these cases, these amounts were fully reserved, and the reserve was reduced as cash was received.
CRA recognized all project revenue on a gross basis based on the consideration of the criteria set forth in Accounting Standards Codification ("ASC") Topic 605-45, Principal Agent Considerations . In general, project costs were classified in costs of services and were based on the direct salary of the consultants on the engagement plus all direct expenses incurred to complete the engagement, including any amounts billed to the Company by its non-employee experts.
Revenues from time-and-materials service contracts were recognized as the services were provided based upon hours worked and contractually agreed-upon hourly rates, as well as indirect fees based upon hours worked.
Under ASC 605, revenues from a majority of CRA's fixed-price engagements were recognized on a proportional performance method based on the ratio of costs incurred, substantially all of which are labor-related, to the total estimated project costs. The proportional performance method was used for fixed-price contracts because reasonably dependable estimates of the revenues and costs applicable to various stages of a contract could be made, based on historical experience and the terms set forth in the contract, and were indicative of the level of benefit provided to CRA's clients. CRA's management maintained contact with project managers to discuss the status of the projects and, for fixed-price engagements, management was updated on the budgeted costs and resources required to complete the project. These budgets were then used to calculate proportional performance ratios and to estimate the anticipated income or loss on the project. Provisions for estimated losses on contracts were made during the period in which such losses become probable and could be reasonably estimated.
Revenues also include reimbursements for costs incurred by CRA in fulfilling its performance obligations, including travel and other out-of-pocket expenses, fees for outside consultants and other reimbursable expenses.
Deferred Compensation
CRA accounts for performance-based and service-based cash awards using a an accrual method where changes in estimates are accounted for prospectively over the remaining service period. To the extent the terms of an award attribute all or a portion of the expected future benefits to a period of service greater than one year, the cost of those benefits is accrued over the employee’s or non-employee's requisite service period in a systematic and rational manner, usually on a straight-line basis.
The requisite service period typically ranges from three to six years starting with the employee’s employment date or non-employee's affiliation date. For an employee or non-employee consultant currently affiliated with CRA, the requisite service period generally begins at the start of the award’s measurement period. A recipient of such an award is expected to be employed by or affiliated with CRA for the entire measurement period. If the recipient’s employment or affiliation with CRA terminates during the measurement period, the amount paid will be determined in accordance with the recipient’s specific contract provisions.
The terms of award agreements may include the achievement of minimum required financial targets over the award’s measurement period. These financial targets may include a measure of revenue generation, profitability or both. The amount of the liability of the award agreements is estimated based on internally generated financial projections. The process of projecting these financial targets over the measurement period is highly subjective and requires significant judgment and estimates. There can be no assurance that the estimates and assumptions used in preparing these projections will prove to be accurate.
Leases
CRA is a lessee under certain operating leases for office space and equipment. Prior to adopting ASC Topic 842, Leases (“ASC 842”) on December 30, 2018, CRA followed the lease accounting guidance as issued in ASC Topic 840, Leases (“ASC 840”). Under ASC 840, CRA classified its leases as operating or capital leases based on evaluation of certain criteria of the lease agreement. For leases that contained rent escalations or rent holidays, CRA recorded the total rent expense during the lease term on a straight-line basis over the term of the lease and recorded the difference between the rents paid and the straight-line rent expense as deferred rent on the balance sheet. Any tenant improvement allowances received from the lessor were recorded as a reduction to rent expense over the term of the lease.
ASC 842, which CRA adopted on December 30, 2018, requires lessees to recognize leases on the balance sheet as a lease liability with a corresponding ROU asset, subject to certain permitted accounting policy elections. Under ASC 842, CRA determines whether a contract is a lease at the inception of the contract. This determination is based on whether the contract provides CRA the right to control the use of a physically distinct asset or substantially all of the capacity of an asset. Leases with an initial noncancelable term of twelve months or less that do not include an option to purchase the underlying asset that CRA is reasonably certain to exercise are classified as short-term leases. CRA has elected as an accounting policy to exclude from the consolidated balance sheets the ROU assets and lease liabilities related to short-term leases. CRA recognizes rent expense for its operating leases on a straight-line basis over the term of the lease.
Many of CRA’s equipment leases are short-term or cancellable with notice. CRA’s office space leases have remaining lease terms between one and approximately twelve years, many of which include one or more options to extend the term for periods of up to five years for each option. Certain leases contain options to terminate the lease early, which may include a penalty for exercising the option. Many of the termination options require notice within a specified period, after which the option is no longer available to CRA if not exercised. The extension options and termination options may be exercised at CRA’s sole discretion. CRA does not consider in the measurement of ROU assets and lease liabilities an option to extend or terminate a lease if CRA is not reasonably certain to exercise the option. As of December 28, 2019, CRA has not included any options to extend or terminate in its measurement of ROU assets or lease liabilities.
Certain of CRA’s leases include covenants that oblige CRA, at its sole expense, to repair and maintain the leased asset periodically during the lease term. CRA is not a party to any leases that contain residual value guarantees nor is CRA a party to any leases that provide an option to purchase the underlying asset.
Many of CRA’s office space leases include fixed and variable payments. Variable payments relate to real estate taxes, sales or use taxes, insurance, operating expenses, and common area maintenance, which are usually billed at actual amounts incurred proportionate to CRA’s rented square feet of the building. Variable payments that do not depend on an index or rate are expensed by CRA as they are incurred and are not included in the measurement of the lease liability.
Many of CRA’s leases contain both lease and non-lease components. For office space leases, the Company has elected as an accounting policy to account for lease and nonlease components as a single component. For equipment leases, fixed and variable payments are allocated to each component relative to observable or estimated standalone prices. CRA measures its variable lease costs as the portion of variable payments that are allocated to lease components.
CRA measures its lease liability for each leased asset as the present value of lease payments, as defined in ASC 842, allocated to the lease component, discounted using an incremental borrowing rate specific to the underlying asset. CRA’s ROU assets are equal to the lease liability, adjusted for lease incentives received, including tenant improvement allowances, and payments made to the lessor prior to the lease commencement date. CRA estimates its incremental borrowing rate for each leased asset based on the interest rate CRA would incur to borrow an amount equal to the lease payments on a collateralized basis over a similar term in a similar economic environment.
Goodwill
In accordance with ASC Topic 350, Intangibles—Goodwill and Other (“ASC Topic 350”), goodwill and intangible assets with indefinite lives are not subject to amortization but are monitored annually as of October 15th for impairment, or more frequently, as necessary, if events or circumstances exist that would more likely than not reduce the fair value of the reporting unit below its carrying amount. For CRA's fiscal 2019 goodwill impairment analysis, it operates as one reporting unit, which is its consulting services.
Under ASC Topic 350, in performing the goodwill impairment testing and measurement process, CRA compares the estimated value of each of its reporting units to its net book value to identify potential impairment. CRA estimates the fair value of its consulting business reporting unit utilizing its market capitalization, plus an appropriate control premium. Market capitalization is determined by multiplying CRA’s shares outstanding on the test date by the market price of its common stock on that date. CRA determines the control premium utilizing data from publicly available premium studies for the trailing four quarters for public company transactions in its industry group. If the estimated fair value of a reporting unit is less than its net book value, an impairment charge would be recorded in CRA’s consolidated statement of operations.
Intangible Assets
Intangible assets are comprised of non-competition agreements and customer relationship intangibles, which are separable from goodwill and have determinable useful lives, are valued separately and amortized over their estimated useful lives based on the pattern in which the economic benefit of the asset is expected to be consumed, if reliably determinable. Non-competition agreements are amortized on a straight-line basis over their useful lives, which range between five and nine years. Customer relationship intangible assets are amortized on a straight-line basis over periods that range between eight and ten years, which approximates the pattern of economic benefit.
Property and Equipment
Property and equipment are recorded at cost. Depreciation is calculated using the straight‑line method based on the estimated useful lives of three years for computer equipment, three to ten years for computer software, and ten years for furniture and fixtures. Amortization of leasehold improvements is calculated using the straight‑line method over the shorter of the lease term or the estimated useful life of the leasehold improvements. Expenditures for maintenance and repairs are expensed as incurred. Expenditures for renewals and betterments are capitalized.
Impairment of Long‑Lived Assets
CRA reviews the carrying value of its long‑lived assets (primarily property and equipment, intangible assets, and ROU assets) to assess the recoverability of these assets whenever events or circumstances indicate that impairment may have occurred. Factors CRA considers important that could trigger an impairment review include, among others, the following:
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a significant underperformance relative to expected historical or projected future operating results;
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a significant change in the manner of CRA’s use of the acquired asset or the strategy for CRA’s overall business; and
·
a significant negative industry or economic trend.
If CRA determines that an impairment review is required, CRA would review the expected future undiscounted cash flows to be generated by the assets or asset groups. If CRA determines that the carrying value of long‑lived assets or asset groups may not be recoverable, CRA would measure any impairment based on a projected discounted cash flow method using a discount rate determined by CRA to be commensurate with the risk inherent in CRA’s current business model. If impairment is indicated through this review, the carrying amount of the assets would be reduced to their estimated fair value.
Fair Value of Financial Instruments
ASC Topic 820, Fair Value Measurements and Disclosures, establishes a fair value hierarchy that prioritizes the inputs used to measure fair value. The hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1 measurement), then priority to quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active and model-based valuation techniques for which all significant assumptions are observable in the market (Level 2 measurement), then the lowest priority to unobservable inputs (Level 3 measurement).
The following table shows CRA’s financial instruments as of December 28, 2019 and December 29, 2018 that are measured and recorded in the consolidated financial statements at fair value on a recurring basis (in thousands):
December 28, 2019
Quoted Prices in
Significant
Active Markets
Other
Significant
for Identical
Observable
Unobservable
Assets or Liabilities
Inputs
Inputs
Level 1
Level 2
Level 3
Assets :
Money market mutual funds
$
150
$
—
$
—
Total Assets
$
150
$
—
$
—
Liabilities :
Contingent consideration liability
$
—
$
—
$
11,579
Total Liabilities
$
—
$
—
$
11,579
December 29, 2018
Quoted Prices in
Significant
Active Markets
Other
Significant
for Identical
Observable
Unobservable
Assets or Liabilities
Inputs
Inputs
Level 1
Level 2
Level 3
Assets :
Money market mutual funds
$
18,029
$
—
$
—
Total Assets
$
18,029
$
—
$
—
Liabilities :
Contingent consideration liability
$
—
$
—
$
6,197
Total Liabilities
$
—
$
—
$
6,197
The fair value of CRA’s money market mutual fund share holdings is $1.00 per share.
The contingent consideration liabilities in the table above are for estimated future contingent consideration payments related to the acquisition of C1 Consulting, LLC, an independent consulting firm, and its wholly-owned subsidiary C1 Associates (collectively, "C1"). The fair value measurement of these liabilities is based on significant inputs not observed in the market and thus represent a Level 3 measurement. The significant unobservable inputs used in the fair value measurements of these contingent consideration liabilities are CRA’s measures of the estimated payouts based on internally generated revenue projections, expected volatility of the revenue projections, and discount rates. The fair value of the contingent consideration was determined using a Monte Carlo simulation. The fair value of these contingent consideration liabilities are reassessed on a quarterly basis by CRA using additional information as it becomes available, and any change in the fair value estimates are recorded in costs of services (exclusive of depreciation and amortization) on the consolidated statements of operations. The contingent consideration is required to be paid prior to the end of the second quarter of fiscal 2021.
The following table summarizes the changes in the contingent consideration liabilities over the fiscal year ended December 28, 2019 and the fiscal year ended December 29, 2018 (in thousands):
December 28,
December 29,
2019
2018
Beginning balance
$
6,197
$
5,137
Remeasurement of acquisition-related contingent consideration
3,285
(244)
Accretion
2,097
1,304
Ending balance
$
11,579
$
6,197
CRA’s financial instruments, including cash and cash equivalents, accounts receivable, accounts payable, and accrued expenses, are carried at cost, which approximates their fair value because of the short‑term maturity of these instruments or because their stated interest rates are indicative of market interest rates.
Income Taxes
CRA records income taxes using the asset and liability method. Deferred tax assets and liabilities are recognized based on estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective income tax bases. CRA includes in the estimate of deferred tax assets and liabilities an estimate of the realizable benefits from operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
CRA is required to establish a valuation allowance on its deferred tax assets to reflect the likelihood of realization. Significant management judgment is required in determining deferred tax assets and liabilities and any valuation allowance recorded against its net deferred tax assets. The weight of all available evidence is evaluated to determine whether it is more likely than not that some portion or all of the deferred income tax assets will not be realized. The decision to record a valuation allowance requires varying degrees of judgment based upon the nature of the item giving rise to the deferred tax asset. If, after a valuation allowance is recorded, it is determined that CRA would be able to realize deferred tax assets in the future in excess of their net recorded amount, CRA would make an adjustment to the deferred tax asset valuation allowance, which would reduce the provision for income taxes.
CRA’s effective tax rate may vary from period to period based on changes in estimated taxable income or loss; changes to the valuation allowance; changes to federal, state, or foreign tax laws; future expansion into areas with varying country, state, and local income tax rates; deductibility of certain costs; uncertain tax positions; expenses by jurisdiction; and results of acquisitions or dispositions.
The calculation of CRA’s tax liabilities involves dealing with uncertainties in the application of complex tax regulations in several different tax jurisdictions. CRA is periodically reviewed by domestic and foreign tax authorities. These reviews include questions regarding the timing and amount of deductions and the allocation of income among various tax jurisdictions. CRA accounts for uncertainties in income tax positions in accordance with ASC Topic 740, Income Taxes (“ASC 740”). The number of years with open tax audits varies depending on the tax jurisdiction.
On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (the "Tax Act") was signed into law. The Tax Act subjects a U.S. shareholder to current tax on global intangible low-taxed income ("GILTI") earned by certain foreign subsidiaries. The FASB Staff Q&A, Topic 740 No. 5, Accounting for Global Intangible Low-Taxed Income , states that an entity can make an accounting policy election to either recognize deferred taxes for temporary differences expected to reverse as GILTI in future years or provide for the tax expense related to GILTI resulting from those items in the year the tax is incurred. The Company has elected to recognize the tax on GILTI as a period expense in the period the tax is incurred. As such, CRA has included its GILTI provision associated with current-year operations solely within the estimated annual effective tax rate ("EAETR") and has not provided additional GILTI on deferred items.
Share‑Based Compensation
CRA accounts for equity-based compensation using a fair value based recognition method. Under the fair value recognition requirements of ASC Topic 718, Compensation-Stock Compensation (“ASC Topic 718”), share-based compensation cost is estimated at the grant date based on the fair value of the award and is recognized as expense over the requisite service period of the award. For those awards that are deemed probable of vesting, CRA recognizes the estimated fair value as expense over the requisite service period of the award. The amount of share-based compensation expense recognized at any date must at least equal the portion of grant date value of the award that is vested at that date. In accordance with ASC Topic 718, for time-vesting restricted stock units awarded to employees, CRA estimates share-based compensation cost at the grant date based on the fair value of the restricted stock units and awards and recognizes the cost for awards that are probable of vesting over the requisite service period on a straight-line basis. Performance-vesting restricted stock units are expensed using the graded acceleration method.
For share‑based awards granted to non‑employee experts, CRA accounts for the compensation under the fair value recognition requirements in accordance with ASC Topic 718 and ASU 2018-07, and recognizes the cost over the related vesting period.
Net Income (Loss) Per Share
CRA computes basic net income or loss per share by dividing net income or loss by the weight |
