| SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES | NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
Basis of Presentation and Principles of
Consolidation
The consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the
United States of America (“GAAP”). The information
herein reflects all normal recurring material adjustments, which
are, in the opinion of management, necessary for a fair statement
of the results for the periods presented. The consolidated
financial statements herein consist of all wholly-owned domestic
and foreign subsidiaries with all significant intercompany
transactions eliminated.
These consolidated financial statements present the financial
position, results of comprehensive income, cash flows and
statements of equity. The presentation of certain prior year
disclosures has been modified to conform to the current year
presentation, as commencing in the first quarter of 2017, the
Company elected to report financial data in whole millions of
dollars, except as otherwise noted.
Use of Estimates
The preparation of financial statements in conformity with GAAP
requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities, disclosure of
contingent assets and liabilities and the reported amounts of
revenue and expenses. Estimates include, but are not limited to,
sales allowances, government price adjustments, fair market values
and future cash flows associated with goodwill, indefinite life
intangibles, long-lived asset impairment tests, useful lives for
depreciation and amortization, warranty liabilities, environmental
liabilities, determination of discount and other assumptions for
pension and other postretirement benefit expense, income taxes and
deferred tax valuation allowances, derivative valuation, and
contingencies. The Company’s accounting policies involve the
application of judgments and assumptions made by management that
include inherent risks and uncertainties. Actual results could
differ materially from these estimates. Changes in estimates are
recorded in results of operations in the period that the events or
circumstances giving rise to such changes occur.
Segment Reporting
In accordance with the Financial Accounting Standards Board’s
(“FASB”) authoritative accounting guidance on segment
reporting, the Company has one operating segment and reportable
segment. The Company is in one line of business, which is the
manufacture and distribution of fully-automatic transmissions.
Cash and Cash Equivalents
Cash equivalents are defined as short-term, highly-liquid
investments with original maturities of 90 days or less. Under
the Company’s cash management system, checks issued but not
presented to banks may result in book overdraft balances for
accounting purposes and are classified within Accounts payable in
the Consolidated Balance Sheets. The change in book overdrafts is
reported as a component of operating cash flows for Accounts
payable.
Marketable Securities
The Company determines the appropriate classification of all
marketable securities as “held-to-maturity,” “available-for-sale” re-evaluates
Trading securities are carried at fair value with the unrealized
gain or loss recognized in Other (expense) income, net. The fair
value of the Company’s investment securities is determined by
currently available market prices. See NOTE 6 “Fair Value of
Financial Instruments” for more details.
Inventories
Inventories are stated at the lower of cost and net realizable
value. The Company determines cost using the first-in, first-out
Property, Plant and Equipment
Property, plant and equipment are recorded at cost less accumulated
depreciation. Depreciation expense is recorded using the
straight-line method over the following estimated lives:
Range in Years
Land improvements 5 – 30
Buildings and building improvements
10 – 40
Machinery and equipment 2 – 20
Software 2 – 5
Special tools 2 – 10
Software represents the costs of software developed or obtained for
internal use. Software costs are amortized on a straight-line basis
over their estimated useful lives. Software assets are reviewed for
impairment when events or circumstances indicate that the carrying
value may not be recoverable over the remaining lives of the
assets. Upgrades and enhancements are capitalized if they result in
added functionality, which enables the software to perform tasks it
was previously incapable of performing. Software maintenance,
training, data conversion and business process reengineering costs
are expensed in the period in which they are incurred.
Special tooling represents the costs to design and develop tools,
dies, jigs and other items owned by the Company and used in the
manufacture of components by suppliers under long-term supply
agreements. Special tooling is depreciated over the tool’s
expected life. Special tooling used in the development of new
technology is expensed as incurred. Engineering, testing and other
costs incurred in the design and development of production parts
are expensed as incurred.
Impairment of Long-Lived Assets
The carrying value of long-lived assets is evaluated whenever
events or circumstances indicate that the carrying value of an
asset may not be recoverable. Events or circumstances that would
result in an impairment review primarily include a significant
change in the use of an asset or the planned sale or disposal of an
asset. The asset would be considered impaired when there is no
future use planned for the asset or the future net undiscounted
cash flows generated by the asset or asset group are less than its
carrying value. An impairment loss would be recognized based on the
amount by which the carrying value exceeds fair value.
Assumptions and estimates used to determine cash flows in the
evaluation of impairment and the fair values used to determine the
impairment are subject to a degree of judgment and complexity. Any
changes to the assumptions and estimates resulting from changes in
actual results or market conditions from those anticipated may
affect the carrying value of long-lived assets and could result in
an impairment charge.
As a result of events and circumstances in the fourth quarter of
2017, the Company reviewed certain of its long-lived assets related
to the production of the TC10 product, resulting in a
$32 million impairment loss recorded for the year ended
December 31, 2017. Continued weak demand conditions for the
TC10 product contributed to the future cash flows of the related
assets being less than the carrying value of those assets.
There were no impairment charges for the year ended
December 31, 2016.
The Company recorded a $1 million impairment loss during 2015
on certain of its long-lived assets related to the production of
the H3000 and H4000 electric hybrid-propulsion systems.
Deteriorating market conditions for hybrid-propulsion vehicles,
principally as a result of decreased fuel costs, alternative fuels
and other technologies, significantly contributed to the future
cash flows of the related assets being less than the carrying value
of those assets.
Goodwill and Other Intangible Assets
Goodwill represents the excess of purchase price paid over the fair
value of net assets acquired. In accordance with the FASB’s
authoritative accounting guidance on goodwill, the Company does not
amortize goodwill but rather evaluates it for impairment on an
annual basis, or more often if events or circumstances change that
could cause goodwill to become impaired. Goodwill is tested for
impairment at the reporting unit level, which is the same as the
Company’s one operating and reportable segment. The Company
does not aggregate any components into its reporting unit. The
Company has elected to perform its annual goodwill impairment test
on October 31 of every year using a multi-step impairment
test. In Step 0, the Company has the option to evaluate various
qualitative factors to determine the likelihood of impairment. If
determined that the fair value is more likely than not less than
the carrying value, then the Company is required to perform Step 1.
If the Company does not elect to perform Step 0, it can voluntarily
proceed directly to Step 1. In Step 1, the Company performs a
quantitative analysis to compare the fair value of its reporting
unit to its carrying value including goodwill. If the fair value of
the reporting unit exceeds the carrying value of the net assets
assigned to that unit, goodwill is not considered impaired, and the
Company is not required to perform further testing. If the carrying
value of a reporting unit’s goodwill exceeds its carrying
value of net assets, then the Company would record an impairment
loss equal to the difference.
Goodwill impairment testing for 2017 was performed using the Step 0
analysis of certain trends and factors. The Company’s
qualitative assessment included an assessment of business changes,
economic outlook, financial trends and forecasts, growth rates,
credit ratings, equity ratings, discount rates, industry data and
other relevant qualitative factors. Events or circumstances that
could unfavorably impact the key assumptions include lower net
sales driven by market conditions, our inability to execute on
marketing programs and/or growth initiatives, lower gross margins
as a result of market conditions or failure to obtain forecasted
cost reductions, or a higher discount rate as a result of market
conditions. While unpredictable and inherently uncertain, the
Company believes the forecast estimates were reasonable and
incorporate assumptions that similar market participants would use
in their estimates of fair value. These trends and factors were
compared to, and based on, the assumptions used in prior years.
After reviewing various qualitative factors, the Company’s
2017 annual goodwill impairment test indicated that the fair value
of the reporting unit more likely than not exceeded its carrying
value, indicating no impairment. Refer to NOTE 5 “Goodwill
and Other Intangible Assets” for further information.
Other intangible assets have both indefinite and finite useful
lives. Intangible assets with indefinite useful lives, such as the
Company’s trade name, are not amortized but are tested
annually for impairment. The Company has elected to perform our
annual trade name impairment test on October 31 of every year
and follow a similar multi-step impairment test to that performed
on goodwill. Events or circumstances that could unfavorably impact
the key assumptions include lower net sales driven by market
conditions, our inability to execute on marketing programs and/or
delay in introduction of new products, and higher discount rate as
a result of market conditions. While unpredictable and inherently
uncertain, the Company believes the forecast estimates are
reasonable and incorporate those assumptions that similar market
participants would use in their estimates of fair value. After
reviewing various qualitative factors, the Company’s annual
2017 trade name impairment test, as of October 31, 2017,
indicated that the fair value of the trade name more likely than
not exceeded its carrying value, indicating no impairment. Refer to
NOTE 5 “Goodwill and Other Intangible Assets” for
further information.
Intangible assets with finite lives are amortized over their
estimated useful lives and reviewed for impairment when
circumstances change that would create a triggering event. Customer
relationships are amortized over the life in which expected
benefits are to be consumed. The other remaining finite life
intangibles are amortized on a straight-line basis over their
useful lives. The Company evaluates the remaining useful life of
the other intangible assets on a periodic basis to determine
whether events or circumstances warrant a revision to the remaining
useful life. Assumptions and estimates about future values and
remaining useful lives of the Company’s intangible and other
long-lived assets are complex and subjective. They can be affected
by a variety of factors, including external factors such as
industry and economic trends, and internal factors, such as changes
in the Company’s business strategy and internal forecasts.
Although management believes the historical assumptions and
estimates are reasonable and appropriate, different assumptions and
estimates could materially impact the Company’s reported
financial results. NOTE 5 “Goodwill and Other Intangible
Assets” provides further information.
Deferred Financing Costs
The debt issuance costs related to line-of-credit non-current
Financial Instruments
The Company’s cash equivalents are invested in U.S.
government backed securities and recorded at fair value in the
Consolidated Balance Sheets. The carrying values of accounts
receivable and accounts payable approximate fair value due to their
short-term nature. The Company’s financial derivative
instruments, including interest rate swaps and foreign currency and
commodity forward contracts are carried at fair value on the
Consolidated Balance Sheets. Refer to NOTE 6 “Fair Value of
Financial Instruments” for more detail. The Company’s
long-term debt obligations are carried at historical amounts with
the Company providing fair value disclosure in NOTE 7
“Debt”.
Insurable Liabilities
The Company records liabilities for its medical, workers’
compensation, long-term disability, product, general and auto
liabilities. The determination of these liabilities and related
expenses is dependent on claims experience. For most of these
liabilities, claims incurred but not yet reported are estimated
based upon historical claims experience.
Revenue Recognition
The Company records sales when title has transferred to the
customer, there is evidence of an agreement, the sales price is
fixed or determinable, delivery has occurred or services have been
rendered, and collectability is reasonably assured. The Company
sells extended transmission coverage (“ETC”) for which
sales are deferred. ETC sales are recognized ratably over the
period of the ETC, which typically ranges from two to five years
after initial sale. Costs associated with ETC programs are recorded
as incurred during the extended period. Distributor and customer
sales incentives, consisting of allowances and other rebates, are
estimated at the time of sale based upon the Company’s
history and experience and are recorded as a reduction to Net
sales. Incentive programs are generally product specific or region
specific. Some factors used in estimating the cost of incentives
include the number of transmissions that will be affected by the
incentive program and rate of acceptance of any incentive program.
If the actual number of affected transmissions differs from this
estimate, or if a different mix of incentives is actually paid, the
impact on Net sales would be recorded in the period that the change
was identified. Consideration given to commercial customers
recorded as a reduction of Net sales in the Consolidated Statements
of Comprehensive Income included $66 million,
$58 million, and $47 million for the years ended
December 31, 2017, 2016 and 2015, respectively.
Sales under U.S. government production contracts are recorded when
the product is accepted, title has transferred to the U.S.
government, the sales price is fixed or determinable, delivery has
occurred, and any other terms of the contract have been met.
Deferred revenue arises from cash received in advance of the
culmination of the earnings process and is recognized as revenue in
future periods when the applicable revenue recognition criteria
have been met. Under the terms of previous U.S. government
contracts, there were certain price reduction clauses and
provisions for potential price reductions which were estimated at
the time of sale based upon the Company’s history and
experience and were recorded as a reduction to Net sales. Potential
reductions may be attributed to a change in projected sales volumes
or plant efficiencies which impact overall costs. As of each of
December 31, 2017 and 2016, the Company had $56 million
recorded in the price reduction reserve account.
The Company engages in licensing agreements with certain third
parties for the use of the Company’s intellectual property.
Deferred revenue arises from cash received in advance of the period
of use of the intellectual property. Revenue is recognized over the
license period as it is earned.
The Company classifies shipping and handling billed to customers in
Net sales and shipping and handling costs in Cost of sales, in
accordance with authoritative accounting guidance.
The Company contracts with various third parties to provide
engineering services. These services are recorded as Net sales in
accordance with the terms of the contract. The saleable engineering
recorded was $3 million, $3 million and $4 million
for the years ended December 31, 2017, 2016 and 2015,
respectively. The associated costs are recorded in Cost of
sales.
Warranty
Provisions for estimated expenses related to product warranties are
made at the time products are sold. Warranty claims arise when a
transmission fails while in service during the relevant warranty
period. The warranty reserve is adjusted in Selling, general and
administrative based on the Company’s current and historical
warranty claims paid and associated repair costs. These estimates
are established using historical information including the nature,
frequency, and average cost of warranty claims and are adjusted as
actual information becomes available. From time to time, the
Company may initiate a specific field action program. As a result
of the uncertainty surrounding the nature and frequency of specific
field action programs, the liability for such programs is recorded
when the Company commits to an action. The Company reviews and
assesses the liability for these programs on a quarterly basis. The
Company also assesses its ability to recover certain costs from its
suppliers and records a receivable from the supplier when it
believes a recovery is probable. Warranty costs may differ from
those estimated if actual claim rates are higher or lower than our
historical rates.
Research and Development
The Company incurs costs in connection with research and
development programs that are expected to contribute to future
earnings. Such costs are charged to Engineering — research
and development as incurred.
Environmental
The Company accrues costs related to environmental matters when it
is probable that the Company has incurred a liability related to a
contaminated site and the costs can be reasonably estimated. For
additional information, see NOTE 16 “Commitments and
Contingencies”.
Foreign Currency Translation
Most of the subsidiaries outside the United States prepare
financial statements in currencies other than the U.S. Dollar.
The functional currency for all of these subsidiaries is the local
currency, except for the Company’s Hong Kong and Middle East
subsidiaries which currently use the U.S. Dollar as their
functional currency. Balances are translated at period-end
Derivative Instruments
In the normal course of business, the Company is exposed to
fluctuations in interest rates, foreign currency exchange rates,
and commodity prices. The risk is managed through the use of
financial derivative instruments including interest rate swaps and
commodity and foreign currency forward contracts, when appropriate.
Despite the fact that the Company either has not elected or does
not qualify for hedge accounting treatment on all of its derivative
instruments, the contracts are used strictly as an economic hedge
and not for speculative purposes. As necessary, the Company adjusts
the values of the derivative instruments for counter-party or
credit risk. NOTE 8 “Derivatives” provides further
information on the accounting treatment of the Company’s
derivative instruments.
Income Taxes
Income taxes are accounted for under the asset and liability
method. Deferred tax assets and liabilities are recognized for the
expected future tax consequences attributable to temporary
differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. The
future tax benefits associated with operating loss and tax credit
carryforwards are recognized as deferred tax assets. 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 need to establish a valuation allowance against the deferred
tax assets is assessed periodically based on a more-likely-than-not
Stock-Based Compensation
In March 2015, the Company’s Board of Directors adopted and,
in May 2015, the Company’s stockholders approved the Allison
Transmission Holdings, Inc. 2015 Equity Incentive Award Plan
(“2015 Plan”), which became effective on May 14,
2015. Under the 2015 Plan, certain employees (including executive
officers), consultants and directors are eligible to receive
equity-based compensation, including non-qualified
Prior to the adoption of the 2015 Plan, the Company’s
equity-based awards were granted under the Allison Transmission
Holdings, Inc. 2011 Equity Incentive Award Plan (“2011
Plan”) and the Equity Incentive Plan of Allison Transmission
Holdings, Inc. (“Equity Plan” and, together with the
2011 Plan, the “Prior Plans”). As of the effective date
of the 2015 Plan, no new awards will be granted under the Prior
Plans, but the Prior Plans will continue to govern the equity
awards issued under the Prior Plans.
RSUs are recorded at fair market value at the date of grant and
vest upon continued performance of services by the RSU holders over
one to three years. Restricted stock awards are recorded at fair
market value at the date of grant and the restrictions lapse upon
continued performance by the restricted stock holders on the vest
date which generally occurs over one, two or three years.
Performance awards are recorded at fair value based on a
Monte-Carlo pricing model and the restrictions lapse on the date
the Compensation Committee of the Board of Directors determines the
number of shares that shall vest based on the total stockholder
return of the Company relative to the specified peer group.
Non-qualified
The Company has made a policy election under applicable accounting
guidance to account for forfeitures as a reduction of stock-based
compensation expense when the forfeiture actually occurs.
Restricted stock and RSUs were granted to certain employees and
directors at fair market value on the date of grant. The
restrictions lapse upon continued performance by the restricted
stock or RSU holders on the vest date which generally occurs over
one, two or three years. Restricted stock and RSU incentive
compensation expense recorded was $7 million, $2 million
and $2 million for the years ended December 31, 2017,
2016 and 2015, respectively.
Performance awards were granted to certain employees at fair value
at the date of grant. The Company records the fair value of each
performance award based on a Monte-Carlo pricing model. Performance
award incentive compensation expense recorded was $3 million,
$1 million and $1 million for the years ended
December 31, 2017, 2016 and 2015, respectively.
Stock options were granted to certain employees at fair value on
the date of grant using a Black-Scholes option pricing model. Stock
option incentive compensation expense recorded was $2 million,
$3 million and $4 million for the years ended
December 31, 2017, 2016 and 2015, respectively.
Pension and Post-retirement Benefit Plans
For pension and other post-retirement benefits (“OPEB”)
plans in which employees participate, costs are determined within
the FASB’s authoritative accounting guidance set forth in
employers’ defined benefit pensions including accounting for
settlements and curtailments of defined benefit pension plans,
termination of benefits and accounting for post-retirement benefits
other than pensions. In accordance with the authoritative
accounting guidance, the Company recognizes the funded status of
its defined benefit pension plans and OPEB plan in its Consolidated
Balance Sheets with a corresponding adjustment to AOCL, net of
tax.
Post-retirement benefit costs consist of service cost and interest
cost on accrued obligations. Actuarial gains and losses on
liabilities together with any prior service costs are charged (or
credited) to income over the average remaining service lives of
employees.
The benefit cost components shown in the Consolidated Statements of
Comprehensive Income are based upon various actuarial assumptions
and methodologies as prescribed by authoritative accounting
guidance. These assumptions include discount rates, expected return
on plan assets, health care cost trend rates, inflation, rate of
compensation increases, population demographics, mortality rates
and other factors. The Company reviews all actuarial assumptions on
an annual basis. Changes in key economic indicators can change
these assumptions. These assumptions, along with the actual value
of assets at the measurement date, will impact the calculation of
pension expenses for the year.
Recently Adopted Accounting Pronouncements
In May 2017, the FASB issued authoritative accounting guidance on
accounting for modifications to the terms of employee stock
compensation. The guidance clarifies which changes to terms or
conditions of share-based payment awards require the entity to
apply modification accounting. The guidance was adopted by the
Company effective January 1, 2018. The adoption of this
guidance is not expected to have a material impact on the
Company’s consolidated financial statements.
In March 2017, the FASB issued authoritative accounting guidance on
the presentation of net periodic pension costs and net periodic
postretirement benefit costs. The guidance clarifies the
presentation of component costs within an employer’s
financial statements and restricts component costs eligible for
capitalization to the service cost component. The guidance was
adopted by the Company effective January 1, 2018.
In January 2017, the FASB issued authoritative accounting guidance
on evaluation of goodwill for impairment. The guidance modifies the
approach to assessing impairment from testing the implied fair
value goodwill to testing the fair value of the reporting unit
carrying the goodwill, which eliminates Step 2 of the prior
evaluation guidance. The intent of this amendment is to reduce the
cost and complexity of evaluating goodwill. The guidance was early
adopted by the Company effective July 1, 2017. The adoption of
this guidance did not have an impact on the Company’s
consolidated financial statements.
In October 2016, the FASB issued authoritative accounting guidance
on the income tax consequences of intra-company transfers other
than inventory. This guidance addresses the timing of the
recognition of current and deferred income taxes. Under this
guidance, the recognition of current or deferred income taxes will
occur at the time of the transfer of the asset. The guidance was
adopted by the Company effective January 1, 2018. The adoption
of this guidance is not expected to have a material impact on the
Company’s consolidated financial statements.
In August 2016, the FASB issued authoritative accounting guidance
on the presentation and classification of certain cash receipts and
cash payments on the statement of cash flows. The guidance
specifically addresses cash flow issues with the objective of
reducing the diversity in practice. The guidance was adopted by the
Company effective January 1, 2018. The adoption of this
guidance is not expected to have a material impact on the
Company’s consolidated financial statements.
In March 2016, the FASB issued authoritative accounting guidance on
share-based payment awards to employees. The guidance involves
several aspects of the accounting for share-based payment
transactions, including the income tax consequences, classification
of awards as either equity or liabilities, and classification on
the statement of cash flows. The guidance was adopted by the
Company effective January 1, 2017. Management recorded an
excess tax benefit of $18 million to income tax expense and as
a component of operating cash flows for the year ended
December 31, 2017, and made the accounting policy election to
account for forfeitures in stock-based compensation as they
occur.
In January 2016, the FASB issued authoritative accounting guidance
on the classification of equity securities with readily
determinable fair values into different categories (e.g. trading or
available-for-sale)
In July 2015, the FASB issued authoritative accounting guidance to
simplify the measurement of inventory. The guidance requires that
inventory be measured at the lower of cost and net realizable
value. When evidence exists that the net realizable value of
inventory is lower than its cost, the difference shall be
recognized as a loss in earnings in the period in which it occurs.
Inventory measured using last-in, first-out
In May 2014, the FASB issued authoritative accounting guidance on a
company’s accounting for revenue from contracts with
customers, which guidance has subsequently been amended. The
guidance applies to all companies that enter into contracts with
customers to transfer goods, services or nonfinancial assets. The
guidance requires these companies 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. The
guidance also requires disclosures regarding the nature, timing,
amount and uncertainty of revenue that is recognized. The guidance
allows either full or modified retrospective adoption. The guidance
was adopted by the Company effective January 1, 2018 using the
modified retrospective approach. Management expects that the
revenue streams that will be impacted by the guidance, although
immaterially, relate to non-standard
Recently Issued Accounting Pronouncements
In February 2016, the FASB issued authoritative accounting guidance
on lease accounting. The guidance requires lessees to present
right-of-use |
