| Overview and Summary of Significant Accounting Policies | Overview and Summary of Significant Accounting Policies Background Perspecta is a leading provider of end-to-end enterprise information technology (“IT”), mission, and operations-related services across the United States (“U.S.”) federal government to the Department of Defense (“DoD”), the intelligence community, and homeland security, civilian and health care agencies, as well as to certain state and local government agencies through two reportable segments: (1) Defense and Intelligence, which provides services to the DoD, intelligence community, branches of the U.S. Armed Forces, and other DoD agencies, and (2) Civilian and Health Care, which provides services to the Departments of Homeland Security, Justice, and Health and Human Services, as well as other federal civilian and state and local government agencies. On May 31, 2018, DXC Technology Company (“DXC”) completed the spin-off of its U.S. Public Sector (“USPS”) business (the “Spin-Off”) and mergers with Vencore Holding Corp (“Vencore HC”) and KGS Holding Corp. (“KGS HC”) (the “Mergers”), which became wholly-owned subsidiaries of Perspecta. As consideration for the Mergers, Perspecta paid affiliates of Veritas Capital Fund Management L.L.C. (“Veritas Capital”) $400 million in cash and approximately 14% of the total number of shares of Perspecta common stock out standing immediately after the Mergers (on a fully diluted basis, excluding certain unvested equity incentive awards). See Note 2 – “ Acquisitions .” Perspecta’s Amendment No. 3 to the Registration Statement on Form 10 (the “Registration Statement”), filed with the Securities and Exchange Commission (“SEC”) on April 30, 2018, was declared effective on May 2, 2018. Perspecta’s common stock began regular-way trading on the New York Stock Exchange on June 1, 2018 under the ticker symbol “PRSP.” The accompanying consolidated combined financial statements and notes present the combined results of operations, financial position, and cash flows of USPS for the periods prior to the completion of the Spin-Off and the combination with Vencore HC and KGS HC. Accordingly, the term “Parent” refers to DXC for the period from April 1, 2017 to May 31, 2018. As used in these Notes, the “Company,” “we,” “us,” and “our” refer to the combined businesses of USPS for the period from April 1, 2017 through May 31, 2018, and to Perspecta and its consolidated subsidiaries beginning June 1, 2018 and for the period from June 1, 2018 through March 31, 2020 . Basis of Presentation The accompanying financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) and pursuant to the rules and regulations of the SEC. In the opinion of management of the Company, the accompanying financial statements of Perspecta and its subsidiaries contain all adjustments, including normal recurring adjustments, necessary to present fairly Perspecta’s financial position as of March 31, 2020 and 2019 and its results of operations and cash flows during the fiscal years ended March 31, 2020 , 2019 and 2018 . Prior to the Spin-Off and Mergers, the Parent maintained various benefit and share-based compensation plans at a corporate level and other benefit plans at a subsidiary level. USPS’s employees participate in those programs and a portion of the cost of those plans are allocated and included on the statement of operations. However, the balance sheets do not include any net benefit plan obligations as the pension plans were accounted as multiemployer benefit plans. After the Spin-Off, DXC does not have any beneficial ownership of Perspecta or USPS. The chairman of the board of directors of Perspecta (the “Board of Directors”) is the former chief executive officer of DXC and served as the chairman of the DXC board of directors until December 31, 2019. Consequently, transactions prior to December 31, 2019 between DXC and Perspecta are reflected as related party transactions pursuant to the disclosure requirements of Accounting Standards Codification (“ASC”) Topic 850, Related Party Disclosures . For additional information about the allocation of expenses from DXC prior to the Spin-Off and certain continuing responsibilities between the Company and DXC, see Note 17 – “ Related Party Transactions .” Principles of Consolidation and Combination The financial statements as of and for the fiscal year ended March 31, 2020 , and the period from June 1, 2018 to March 31, 2019, reflect the financial position and results of operations of the Company, its consolidated subsidiaries and the joint ventures and partnerships over which the Company has a controlling financial interest. The financial statements as of and for periods prior to the consummation of the Spin-Off reflect the financial position and results of operations of USPS as described above. All intercompany transactions and accounts within the combined businesses of USPS have been eliminated. Intercompany transactions between USPS and Parent other than leases with Hewlett Packard Enterprise Company’s (“ HPE”) wholly-owned leasing subsidiary (“HPE Financial Services”) were considered to be effectively settled in the combined financial statements at the time the transactions were recorde d. The total net effect of the settlement of these intercompany transactions is reflected in the combined statements of cash flows within financing activities. The financial statements for the periods prior to the Spin-Off are prepared on a carved-out and combined basis from the financial statements of DXC. The combined statements of operations of USPS reflect allocations of general corporate expenses from DXC, including, but not limited to, executive management, finance, legal, IT, employee benefits administration, treasury, risk management, procurement and other shared services. These allocations were made on a direct usage basis when identifiable, with the remainder allocated on the basis of revenue, expenses, headcount or other relevant measures. Management of Perspecta considers these allocations to be a reasonable reflection of the utilization of services by, or the benefits provided to, USPS. The allocations may not, however, reflect the expense USPS would have incurred as a stand-alone company for the periods presented. Actual costs that may have been incurred if USPS had been a stand-alone company would depend on a number of factors, including the chosen organizational structure, what functions were outsourced or performed by employees and strategic decisions made in areas such as IT and infrastructure. Business Segment Information The Company reports separately information about each of its operating segments that engage in business activities from which revenue is recognized and expenses are incurred, and for which discrete financial information is available. These operating results are regularly reviewed by the Company’s chief operating decision maker, who is the Chief Executive Officer. The two reportable segments are aligned with the Company’s industries: • Defense and Intelligence - provides services to the DoD, intelligence community, branches of the U.S. Armed Forces, and other DoD agencies. • Civilian and Health Care - provides services to the Departments of Homeland Security, Justice, and Health and Human Services, as well as other federal civilian and state and local government agencies. The segment information for the period prior to the Spin-Off has been recast to reflect the Company’s current reportable segment structure. There is no impact on the Company’s previously reported consolidated combined statements of operations, balance sheets or statements of cash flows resulting from these segment changes. Use of Estimates The preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Amounts subject to significant judgment and/or estimates include, but are not limited to, intangible assets, goodwill, fair value, certain deferred costs, valuation allowances on deferred tax assets, loss accruals for litigation, and inputs used for computing share-based compensation. These estimates are based on management’s best knowledge of historical experience, current events, and various other assumptions that management considers reasonable under the circumstances. Reclassifications Certain prior period balances in the accompanying financial statements have been reclassified to conform to the current period presentation. These reclassifications had no impact on total assets, total liabilities, total equity, income before taxes or net income. Revenue Recognition The Company’s revenue from contracts with customers is derived from its primary service offerings, including technology and business solutions, systems engineering and integration, cybersecurity, applied research and big data analytics, and investigative and risk mitigation services to the U.S. government and its agencies. The Company also serves various state and local governments. The Company performs under various types of contracts, which include (1) fixed price contracts, such as firm-fixed-price (“FFP”), (2) cost reimbursable contracts such as cost-plus-fixed-fee, cost-plus-award-fee and cost-plus-incentive-fee, and (3) time-and-materials (“T&M”) contracts, including fixed-price-level-of-effort (“FP-LOE”) contracts. To determine the proper revenue recognition, the Company first evaluates whether it has a duly approved and enforceable contract with a customer, in which the rights of the parties and payment terms are identified, and collectability is probable. The Company also evaluates whether two or more contracts should be combined and accounted for as a single contract, including the task orders issued under an indefinite delivery/indefinite quantity award. In addition, the Company assesses contract modifications to determine whether the changes to existing contracts should be accounted for as part of the original contract or as a separate contract. Contract modifications for the Company may relate to changes in contract specifications and requirements and do not add distinct services, and therefore are accounted for as part of the original contract. If contract modifications add distinct goods or services and increase the contract value by the stand-alone selling price, those modifications are accounted for as separate contracts. For each contract, the Company assesses if multiple promises should be accounted for as separate performance obligations or combined into a single performance obligation. The Company generally separates multiple promises in a contract as separate performance obligations if those promises are distinct, both individually and in the context of the contract. If multiple promises in a contract are highly interrelated or comprise a series of distinct services performed over time, they are combined and accounted for as a single performance obligation. The Company’s contracts with the U.S. federal government often contain options to renew existing contracts for an additional period of time (generally a year at a time) under the same terms and conditions as the original contract. The Company accounts for renewal options as separate contracts when they include distinct goods or services at stand-alone selling prices. Contracts with the U.S. federal government are generally subject to the Federal Acquisition Regulation (“FAR”) and priced on an estimated or actual costs of providing the goods or services. The FAR provides guidance on types of costs that are allowable in establishing prices for goods and services provided to the U.S. federal government and its agencies. Each contract is competitively priced and bid separately. Pricing for non-U.S. federal government agencies is based on specific negotiations with each customer. The Company excludes any taxes collected or imposed when determining the transaction price. Certain of the Company’s contracts contain award fees, incentive fees or other provisions that may either increase or decrease the transaction price. These variable amounts generally are awarded upon achievement of certain performance metrics, program milestones or cost targets and can be based upon customer discretion. The Company estimates variable consideration at the expected value amount to which it expects to be entitled based on the assessment of the contractual variable fee criteria, complexity of work and related risks, extent of customer discretion, amount of variable consideration received historically and the potential of significant reversal of revenue. The Company allocates the transaction price of a contract to its performance obligations in the proportion of such obligation’s stand-alone selling price. The stand-alone selling prices of the Company’s performance obligations are generally based on an expected cost-plus margin approach. For certain product sales, the Company uses prices from other stand-alone sales. Substantially none of the Company’s contracts contain a significant financing component that would require an adjustment to the transaction price of the contract. The Company recognizes revenue on our service contracts primarily over time as there is continuous transfer of control to the customer over the duration of the contract as the Company performs the promised services. For U.S. federal government contracts, continuous transfer of control to the customer is evidenced by clauses in the contract that allow the customer to unilaterally terminate the contract for convenience, pay for costs incurred plus a reasonable profit and take control of any work-in-process. The Company’s IT and business process outsourcing arrangements typically have a single performance obligation that are a series of distinct goods or services that are substantially the same and are provided over a period of time using the same measure of progress. Revenue derived from IT and business process outsourcing arrangements is generally comprised of a series of distinct services, and thus, is recognized over time based upon the level of services delivered in the distinct periods in which they are provided using an input method based on time increments. IT outsourcing arrangements may include nonrefundable upfront fees billed for activities to familiarize us with the client’s operations, take control over their administration and operation, and adapt them to the Company’s solutions. These activities typically do not qualify as separate performance obligations, and the related revenue is allocated to the relevant performance obligation and satisfied over time as the performance obligation is satisfied. On FFP contracts, revenue recognized over time generally uses a method that measures the extent of progress toward completion of a performance obligation, principally using a cost-input method (referred to as the cost-to-cost method). Under the cost-to-cost method, revenue is recognized based on the proportion of total cost incurred to estimated total costs at completion (“EAC”). The cost-to-cost method best depicts the Company’s performance and transferring control of services promised to the customer. A performance obligation’s EAC includes all direct costs such as materials, labor, subcontract costs, overhead, and a ratable portion of general and administrative costs. In addition, the Company includes in an EAC future losses of a performance obligation estimated to be incurred on onerous contracts, as and when known, and the most likely amount of transaction price (revenue) that the Company expects to receive for unpriced change orders (modifications). On certain other contracts, principally T&M, FP-LOE, and cost-plus-fixed-fee, revenue is recognized using the right-to-invoice practical expedient as we are contractually able to invoice the customer based on the control transferred to the customer. When a performance obligation is not satisfied over time, the Company recognizes revenue when it satisfies the performance obligation at a point in time. To determine the point in time at which a performance obligation is satisfied, the Company considers indicators of the transfer of control in accordance with ASC Topic 606, Revenue from Contracts with Customers (“ASC 606”) , including delivery of services to the customer, acceptance of services by the customer and having present right to payment. Billed Receivables Amounts billed and due from the Company’s customers, primarily the U.S. federal government, are classified as receivables, net of allowance for doubtful accounts on the balance sheets. Contract Balances Contract assets consist of unbilled receivables, which result from services provided under contracts when revenue is recognized over time, revenue recognized exceeds the amounts billed to the customer, and right to payment is not just subject to the passage of time. Amounts are invoiced as work progresses in accordance with agreed-upon contractual terms, either at periodic intervals or upon achievement of contractual milestones. Payment to employees and third parties for services provided to customers is generally immediate, while the related billing is generally within 90 days. The portion of the payments retained by the customer until final contract settlement is not considered a significant financing component because the intent is to protect the customer in the event the Company does not perform on our obligations under the contract. Contract liabilities include advance contract payments and billings in excess of revenue recognized. Under certain contracts, the Company receives advances and milestone payments from its customers that exceed revenue earned to date, resulting in contract liabilities. Advances typically are not considered a significant financing component because it is used to meet working capital demands that can be higher in the early stages of a contract and to protect the Company from the customer failing to adequately complete some or all of its obligations under the contract. Costs to Obtain a Contract Certain sales commissions earned by the Company’s sales force are considered incremental and recoverable costs of obtaining a contract with a customer. Sales commissions are deferred and amortized on a straight-line basis over the term of the contract, not to exceed five years. The closing balance of the associated asset and expense was not material as of and during the fiscal year ended March 31, 2020 . Costs to Fulfill a Contract Costs incurred to fulfill a contract include costs that are directly related to a contract or an anticipated contract that generate or enhance resources to be used in satisfying performance obligations and are expected to be recovered. These costs are recognized as an asset in accordance with ASC Topic 340, Other Assets and Deferred Costs , and are recognized on a systematic basis that is consistent with the transfer to the customer of the services to which the asset relates. The closing balance of the associated asset and expense was not material as of and during the fiscal year ended March 31, 2020 . Share-based Compensation Expense The Company provides different forms of share-based compensation to its employees and non-employee directors. This includes time-based restricted stock units (“RSUs”), performance-based restricted stock units (“PSUs”), and stock options. The Company accounts for share-based compensation in accordance with ASC Topic 718 Compensation—Stock Compensation , which requires the use of a valuation model to calculate the fair value of certain share-based awards. The fair value of the RSUs and the PSUs awards is determined on the grant date, based on the Company’s closing stock price. Share-based awards generally vest one to three years from the date of grant and are subject to forfeiture if employment terminates prior to the lapse of the restrictions. We expense the fair value of share-based awards on a straight-line basis over the service period during which the restrictions lapse. The Company accounts for forfeitures as they occur. Income Taxes The Company recognizes deferred tax assets and liabilities for the expected tax consequences of temporary differences between the tax bases of assets and liabilities and their reported amounts using enacted tax rates in effect for the year the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date. The Company recognizes deferred tax assets to the extent that it believes these assets are more likely than not to be realized. In making such a determination, the Company considers all available positive and negative evidence including future reversals of existing taxable temporary differences, projected future taxable income, tax-planning strategies and results of recent operations. If the Company determines that it would not be able to realize the deferred tax assets in the future equal to their net recorded amount, the Company would record a valuation allowance to reduce the deferred tax assets to the amount that is more likely than not to be realized. The Company records accruals for uncertain tax positions in accordance with ASC Topic 740, Income Taxes , on the basis of a two-step process in which (1) the Company determines whether it is more likely than not that the tax positions will be sustained on the basis of the technical merits of the position and (2) for those tax positions that meet the more likely than not recognition threshold, the Company recognizes the largest amount of tax benefit that is more than 50 percent likely to be realized upon ultimate settlement with the related tax authority. The Company makes adjustments to these accruals when facts and circumstances change, such as the closing of a tax audit. The provision for income taxes includes the effects of adjustments for uncertain tax positions, as well as any related interest and penalties. Interest and penalties related to unrecognized tax benefits are recognized and included in the provision for income taxes on the accompanying statements of operations. Accrued interest and penalties are included in the related tax liability on the balance sheets. Prior to the Spin-Off and Mergers, the Company's operations were included in the tax returns filed by the respective Parent entities of which USPS’s businesses were a part. Income tax expense and other income tax related information for those periods contained in these financial statements are presented on a separate return basis as if USPS filed its own tax returns. The separate return method applies the accounting guidance for income taxes to the standalone financial statements as if USPS were a separate taxpayer and a standalone enterprise for the periods presented. Current income tax liabilities were assumed to be settled with Parent on the last day of the reporting periods and were relieved through the Parent company investment account and the transfers from (to) Parent, net on the statements of cash flows. Cash and Cash Equivalents The Company considers investments with an original maturity of three months or less to be cash equivalents. Restricted Cash The Company accounts for amounts collected associated with its MARPA Facility and unremitted to the Financial Institutions as restricted cash within our other current assets caption on the balance sheet, as well as any other cash balances that are contractually restricted from use in operations. See Note 5 – “ Receivables ” for additional information and definitions of MARPA Facility and Financial Institutions. Concentrations of Risk Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of receivables from trade customers and financing receivables. Perspecta performs ongoing credit evaluations of the financial condition of its customers. The Company’s receivables are primarily with the U.S. federal government, and thus the Company does not have material credit risk exposure. Property and Equipment Property and equipment, which includes assets under finance lease, are stated at cost less accumulated depreciation and amortization. Depreciation and amortization are computed using the straight-line method over the estimated useful life of the asset or the remaining lease term, whichever is shorter. The estimated useful lives of the Company’s property and equipment are as follows: Property and Equipment Estimated Useful Lives Buildings Up to 40 years Computers and related equipment 4 to 5 years Furniture and other equipment 2 to 15 years Land Not a depreciable asset Leasehold improvements Shorter of lease term or useful life Leases The Company leases certain real and personal property under non-cancelable operating leases. Lease assets under finance leases are comprised primarily of computers and related equipment. Finance lease obligations primarily consist of contractual arrangements with HPE Financial Services. Under ASC 842, an arrangement is determined to be a lease at inception if it conveys the right to control the use of an identified asset for a period of time in exchange for consideration. At inception, we determine whether the contract is or contains a lease and, if so, whether the lease should be classified as an operating or a finance lease. The Company recognizes a right-of-use (“ROU”) asset and a lease liability based on the present value of the future minimum lease payments over the lease term at the commencement date, adjusted for any lease incentives, initial direct costs, and potential impairment. At the commencement date, a single discount rate is applied to a group of leases with the same durations. The rate is updated quarterly for new leases that commence during the period, unless a triggering event occurs requiring more frequent reassessment. We define the initial lease term to include renewal options determined to be reasonably certain. Lease assets are evaluated for impairment in a manner consistent with the treatment of other long-lived assets. Certain leases require us to pay property taxes, insurance and routine maintenance, which are included in variable lease expense. At March 31, 2020 , the Company did not have any lease agreements with residual value guarantees or material restrictions or covenants. The Company's lessor arrangements with its customers are immaterial to the results of operations and cash flows. The Company includes both the amortization of operating lease assets and changes in the lease liabilities in changes in other assets and liabilities, net on the statement of cash flows. Acquisition Accounting and Goodwill When the Company acquires a controlling financial interest through a business combination, it uses the acquisition method of accounting to allocate the purchase consideration to the assets acquired and liabilities assumed, which are recorded at fair value as measured on the date of acquisition. Any excess of purchase consideration over the fair value of the assets acquired and liabilities assumed is recognized as goodwill. Acquisition-related costs are recognized separately from the business combination and are expensed as incurred. The results of operations of acquired businesses are included in the financial statements from the acquisition date. In accordance with ASC Topic 350, Goodwill and Other Intangible Assets, the Company tests goodwill for impairment on an annual basis, as of the first day of the second fiscal quarter, and between annual tests if circumstances change, or if an event occurs that would more likely than not reduce the fair value of a reporting unit below its carrying amount. Factors which could necessitate an interim impairment assessment include, but are not limited to, a sustained decline in our stock price, significant decreases in federal government appropriations or funding for our contracts, the loss of significant business or significant underperformance relative to historical or projected future operating results. Determining the fair value of a reporting unit is judgmental in nature and involves the use of significant estimates and assumptions that we believe are reasonable but inherently uncertain, and actual results may differ from those estimates. The Company engages a third-party valuation specialist to estimate the fair value of the reporting units using both an income approach and a market approach. The income approach incorporates the use of a discounted cash flow method in which the estimated future cash flows and terminal values for each reporting unit are discounted to a present value using a discount rate. Cash flow projections are based on management’s estimates of economic and market conditions, which drive key assumptions of revenue growth rates, operating income, capital expenditures, and working capital requirements. The results of these approaches are used to corroborate the conclusion. The Company’s annual goodwill impairment analysis, which was performed qualitatively as of July 1, 2019, did not result in an impairment charge. Subsequently, the U.S. Navy announced on February 5, 2020 that Perspecta was not awarded the NGEN-R SMIT contract. The Company performed an interim impairment assessment in the fourth quarter of fiscal year 2020, resulting in the impairment charge discussed further in Note 8 – “ Goodwill ,” as well as impairment charges discussed further in Note 9 – “ Intangible Assets .” Intangible Assets The estimated useful lives for finite-lived intangible assets are shown below: Intangible Assets Estimated Useful Lives Acquired backlog 1 year Software 2 to 10 years Developed technology 6 to 7 years Program assets 4 to 14 years Outsourcing contract costs Contract life, excluding option years Acquired backlog intangible assets represent the funded economic value of predominantly long-term contracts, less the amount of revenue a lready recognized on those contracts. Acquired backlog was valued using the excess earnings approach, amortized over a one year period. Software is amortized predominantly using the straight-line method. Developed technology intangible assets represent acquired intellectual property and were valued using the relief from royalty method. Program assets are acquired customer relationships and are amortized in proportion to the estimated undiscounted cash flows projected over the estimated life of the asset or on a straight-line basis if such cash flows cannot be reliably estimated. Costs of outsourcing contracts, including costs incurred for bid and proposal activities, are generally expensed as incurred. However, certain costs incurred upon initiation of an outsourcing contract are deferred and expensed on a straight-line basis over the contract life, excluding option years. These costs represent incremental external costs or certain specific internal costs primarily associated with assuming control over customer IT operations and transforming them consistent with contract specifications. Long-Lived Asset Impairment The Company reviews intangible assets with finite lives and long-lived assets for impairment whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. The Company assesses the recoverability of assets based on the estimated undiscounted future cash flows expected to result from the use and eventual disposition of the asset. If the undiscounted future cash flows are less than the carrying amount, the asset is impaired. We measure the amount of impairment loss, if any, as the difference between the carrying amount of the asset and its fair value using an income approach or, when available and appropriate, using a market approach. Fair Value The Company accounts for recurring and non‑recurring fair value measurements in accordance with ASC Topic 820, Fair Value Measurement (“ASC 820”). ASC 820 defines fair value, establishes a fair value hierarchy for assets and liabilities measured at fair value and requires expanded disclosures about fair value measurements. The ASC 820 hierarchy ranks the quality of reliability of inputs, or assumptions, used in the determination of fair value and requires assets and liabilities carried at fair value to be classified and disclosed in one of the following three categories: Level 1 - Fair value is determined by using unadjusted quoted prices that are available in active markets for identical assets and liabilities. Level 2 - Fair value is determined by using inputs other than Level 1 quoted prices that are directly or indirectly observable. Inputs can include |
