| SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES | 2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying interim consolidated financial statements have
been prepared in accordance with accounting principles generally
accepted in the United States of America (“GAAP”) and
pursuant to the rules and regulations of the Securities and
Exchange Commission (“SEC”) for reporting interim
financial information and should be read in conjunction with the
Company’s consolidated financial statements and accompanying
footnotes in our prospectus dated April 28, 2021, filed with
the SEC on April 30, 2021 pursuant to Rule 424(b) of the
Securities Act of 1933, as amended (referred to herein as the
“Prospectus”). Certain information and note disclosures
normally included in annual financial statements have been
condensed or omitted from these interim financial statements. The
interim consolidated financial statements as of March 31, 2021
and for the three months ended March 31, 2020 and 2021 are
unaudited; however, in the opinion of management, such interim
consolidated financial statements reflect all adjustments,
consisting solely of normal and recurring adjustments, necessary
for a fair statement of its financial position, results of
operations and cash flows for the interim periods presented.
During the fourth quarter of 2020, the Company concluded there was
a revision required to the presentation of Zuffa Parent,
LLC’s (“Zuffa”) distributions to Silver Lake and
the related issuances of common stock units and the convertible
promissory note by the Company in the consolidated statements of
cash flows for the first three quarters of 2020. Such distributions
and related issuances are described in Note 12. The Company
originally reported these distributions and the related issuances
as financing cash flows rather than correctly presenting them as
non-cash non-cash
Use of Estimates
The preparation of consolidated financial statements in conformity
with GAAP requires management to make estimates and assumptions
that affect the amounts reported and disclosed in the consolidated
financial statements and the accompanying disclosures.
Significant accounting policies that contain subjective management
estimates and assumptions include those related to revenue
recognition, allowance for doubtful accounts, content cost
amortization and impairment, the fair value of acquired assets and
liabilities associated with acquisitions, the fair value of the
Company’s reporting units and the assessment of goodwill,
other intangible assets and long-lived assets for impairment,
consolidation, investments, redeemable non-controlling
Management evaluates these estimates using historical experience
and other factors, including the general economic environment and
actions it may take in the future. The Company adjusts such
estimates when facts and circumstances dictate. However, these
estimates may involve significant uncertainties and judgments and
cannot be determined with precision. In addition, these estimates
are based on management’s best judgment at a point in time
and as such, these estimates may ultimately differ from actual
results. Changes in estimates resulting from weakness in the
economic environment or other factors beyond the Company’s
control could be material and would be reflected in the
Company’s consolidated financial statements in future
periods. | 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements are prepared in conformity
with accounting principles generally accepted in the United States
of America (“GAAP”).
The consolidated financial statements include the accounts of all
wholly-owned subsidiaries and other subsidiaries in which a
controlling voting interest is maintained, which is typically
present when the Company owns a majority of the voting interest in
an entity and the non-controlling Consolidation Non-controlling non-controlling
Reclassifications
Certain reclassifications have been made to the prior
periods’ consolidated financial statements in order to
conform to the current period presentation. These reclassifications
did not impact any prior amounts of net income (loss) or cash
flows.
Use of Estimates
The preparation of consolidated financial statements in conformity
with GAAP requires management to make estimates and assumptions
that affect the amounts reported and disclosed in the consolidated
financial statements and the accompanying disclosures.
Significant accounting policies that contain subjective management
estimates and assumptions include those related to revenue
recognition, allowance for doubtful accounts, content cost
amortization and impairment, the fair value of acquired assets and
liabilities associated with acquisitions, the fair value of the
Company’s reporting units and the assessment of goodwill,
other intangible assets and long-lived assets for impairment,
consolidation, investments, redeemable non-controlling
Management evaluates these estimates using historical experience
and other factors, including the general economic environment and
actions it may take in the future. The Company adjusts such
estimates when facts and circumstances dictate. However, these
estimates may involve significant uncertainties and judgments and
cannot be determined with precision. In addition, these estimates
are based on management’s best judgment at a point in time
and as such, these estimates may ultimately differ from actual
results. Changes in estimates resulting from weakness in the
economic environment or other factors beyond the Company’s
control could be material and would be reflected in the
Company’s consolidated financial statements in future
periods.
Revenue Recognition
The Company’s Owned Sports Properties segment primarily
generates revenue via media rights fees, sponsorships, ticket
sales, subscriptions, license fees and pay-per-view.
Effective January 1, 2018, the Company adopted FASB ASC
Topic 606, Revenue from Contracts with Customers
Revenue is recognized when control of the promised goods or
services is transferred to the Company’s customers either at
a point in time or over time, in an amount that reflects the
consideration the Company expects to receive in exchange for those
goods or services. For contracts which have more than one
performance obligation, the total transaction price, which includes
the estimated amount of variable consideration, is allocated based
on observable prices or, if standalone selling prices are not
readily observable, based on management’s estimate of each
performance obligation’s standalone selling price. The
variable consideration contained in the Company’s contracts
includes sales or usage-based royalties earned on licensing the
Company’s intellectual property and commissions earned on
sales or usage-based royalties related to representing its clients,
which are recognized in accordance with the sales or usage-based
royalty exception under ASC 606. The variability related to these
royalties will be resolved in the periods when the licensee
generates sales or usage related to the intellectual property
license. For the Company’s contracts that do not include
licensing of intellectual property, the Company either estimates
the variable consideration, subject to the constraint, or is using
the variable consideration allocation exception if applicable. The
following are the Company’s primary sources of revenue.
Representation
The Company earns commissions on its clients’ earnings from
their engagements. As part of the client representation business,
the Company represents, supports and advocates for its clients in
the sourcing, negotiating, and execution of income generating
engagements. The Company’s clients include actors, writers,
directors, producers, athletes, models, photographers, musicians
and other creative professionals.
The Company’s promise, as well as its performance obligation,
under the Company’s representation arrangements is to achieve
a successful engagement for its clients, which is fulfilled when
its clients perform in accordance with the terms of their
respective engagements. Accordingly, the Company recognizes
commission revenue when a client achieves a successful engagement,
as this is the point in time that a client obtains control of the
representation service.
The Company’s clients may receive a fixed fee for their
services or receive a combination of a fixed fee and the potential
to earn a back-end back-end back-end back-end back-end
The Company earns packaging revenue by playing an integral role in
arranging the creation, development, and/or production of a program
that will be exhibited on broadcast, cable, streaming, video-on-demand back-end
The Company’s promise, as well as its performance obligation,
under packaging arrangements is the successful execution of the
project, which is fulfilled when the studio transfers control of
each episode of a packaged program to the network. Accordingly, the
Company recognizes its commission on the initial network license
fee when its customer achieves a successful execution of the
project as this is the point in time the Company’s customer
obtains control of its service. Commission revenue from
participation in back-end back-end
Content Development
Revenue from production services and studio fees for the production
and licensing of original content, including television properties,
documentaries and films, is recognized when the content becomes
available for exploitation and has been accepted by the customer.
Revenue from production services of live entertainment and sporting
events is recognized at the time of the event on a per event basis.
Revenue from production services of editorial video content is
recognized when the content is delivered to and accepted by the
customer and the license period begins. Revenue for license fees
that include a royalty is recognized in the period the royalty is
generated following the sales and usage based royalty exception for
licenses of functional intellectual property. Customers for the
Company’s production services include broadcast networks,
sports federations, independent content producers, and over-the-top
Revenue from concept development and advisory services to
independent production companies is recognized over the period the
services are performed.
Content Distribution and Sales
The Company is an independent global distributor of sports
programming and possesses relationships with a wide variety of
broadcasters and media partners around the world. The Company sells
media rights globally on behalf of its clients as well as its owned
assets, including Ultimate Fighting Championship
(“UFC”), Professional Bull Riders (“PBR”)
and Miss Universe. For sales of media and broadcast rights for
live entertainment and sporting event programming on behalf of
clients, the Company has both arrangements in which it is acting as
a principal (full rights buy-out
•
Full rights buy-out
•
Commission model: For media rights sales in which the
Company does not obtain control of the underlying rights, the
Company earns a commission equal to a stated percentage of the
license fees for the rights distributed. As the Company does not
obtain control of the underlying media rights, the Company
recognizes the sales commission as revenue. The Company’s
performance obligation generally includes distributing the live
video feed and revenue is typically recognized on an event
basis.
For owned assets, the Company enters into media rights agreements
with broadcasters and other distributors for the airing of certain
programming rights the Company produces. The Company’s media
rights agreements are generally for multiple years, include a
specified amount of programming (both number of events and
duration) and contain fixed annual rights fees. The programming
under these arrangements can include several performance
obligations for each contract year such as media rights for live
event programming, episodic programming, taped programming archives
and sponsorship rights at the underlying events. The Company
allocates the transaction price across performance obligations
based on management’s estimate of the standalone selling
price of each performance obligation. License fees from media
rights are recognized when the event or program has been delivered
and is available for exploitation. The transaction price for live
entertainment and sporting event programming rights is generally
based on a fixed license fee. Revenue from pay-per-view pay-per-view Pay-per-view
Commission revenue from distribution and sales arrangements for
television properties, documentaries and films of independent
production companies is recognized when the underlying content
becomes available for view or telecast and has been accepted by the
customer.
Events
The Company earns fees from events that it controls in addition to
providing event related services to events controlled by third
parties. The Company generates revenue primarily through ticket
sales and participation entry fees, hospitality and sponsorship
sales, and management fees each of which may represent a distinct
performance obligation or may be bundled into an experience
package. The Company allocates the transaction price to all
performance obligations contained within an arrangement based upon
their relative stand-alone selling price.
For controlled events (owned or licensed), revenue is generally
recognized for each performance obligation over the course of the
event, multiple events, or contract term in accordance with the
pattern of delivery for the particular revenue source. Advance
ticket sales, participation entry fees and hospitality sales are
recorded as deferred revenue pending the event date. Sponsorship
income is recognized over the term of the associated event, or
events, to which the sponsorship is associated. Revenue from
merchandise sales and concessions is recognized when the products
are delivered which is generally at point of sale during the event.
Where third party vendors provide merchandise sales and concessions
for owned events and the Company receives a profit participation on
such sales, the Company recognizes the profit participation as
revenue.
The Company’s bundled experience packages may include
individual and package sale of tickets, travel, experiential
hospitality, amenities and transportation. For these
experience packages, the Company recognizes revenue at the event
date when all of the package components have been delivered to the
customer. The Company defers the revenue and cost of revenue
on experience packages until the date of the event.
For services related to third-party controlled events, the
Company’s customer is the third party event owner. The
Company earns fixed and/or variable commission revenue for ticket
sales, collection of participation entry fees, hospitality sales or
sponsorship sales on behalf of an event owner. For these
arrangements, the Company recognizes as revenue the stated
percentage of commissions due from the event owner (i.e. not the
gross ticket sales/earnings from the event itself) as sales are
completed, as the Company is acting as an agent of the event owner.
The Company also provides event management services to assist third
party event owners with producing certain live events, including
managing hospitality and sponsorships. The Company earns fixed fees
and/or variable profit participation commissions for event
management services, and generally recognizes such revenue under
the series guidance over the course of the event, multiple events,
or contract term in accordance with the pattern of delivery for the
service. For event management services, the Company may process
payments to third party vendors on behalf of the event owner. The
Company accounts for the pass-through of such third party vendor
payments either on a gross or net basis depending on whether the
Company obtains control of the third party vendor’s
services.
Marketing
The Company provides marketing and consultancy services to brands
with expertise in brand strategy, activation, sponsorships,
endorsements, creative development and design, digital and original
content, public relations, live events, branded impact and B2B
services. Marketing revenue is either recognized over time, based
on the number of labor hours incurred, costs incurred or time
elapsed based on the Company’s historical practice of
transferring similar services to customers, or at a point in time
for live event activation engagements. Consulting fees are
typically recognized over time, based on the number of labor hours
incurred.
Licensing
Licensing revenue is generated from royalties or commissions from
sales of licensed merchandise by the licensee. The nature of the
licensing arrangements is typically for logos, trade names,
trademarks and related forms of symbolic intellectual property to
include in merchandise sales. Certain of the licensing agreements
contain minimum guaranteed fees that are recoupable during the term
of the agreement, and variable royalties after the minimum is
recouped. The Company recognizes revenue for the fixed
consideration over time based on the terms of the arrangement.
Variable revenue is recognized during the period the royalty or
commission is generated, following the royalty exception for
licenses of symbolic intellectual property, based on either
statements received or management’s best estimates if
statements are received on a lag.
Endeavor Streaming
Through Endeavor Streaming, the Company offers digital streaming
video solutions. The Company’s digital streaming video
solutions represent a single performance obligation recognized over
time under the series guidance. Revenue is generally recognized
upon delivery of the offering to the consumer or over the course of
an over-the-top
Performance
The Company also owns performance facilities used to train and
educate athletes. Revenue derived from performance operations is
primarily related to membership fees and tuition based fees
(including room and board), which are generally received in advance
of the academic year and recorded as deferred revenue. Revenue is
recognized ratably over the period of the athletes’
membership or attendance at a facility, as the services provided
are substantially the same throughout the service period.
Principal versus Agent
The Company enters into many arrangements that requires the Company
to determine whether it is acting as a principal or an agent. This
determination involves judgment and requires evaluation as to
whether the Company controls the goods or services before they are
transferred to the customer. As part of this analysis, the Company
considers if it is primarily responsible for fulfillment and
acceptability of the goods or services, if it has the inventory
risk before or after the transfer to the customer, and if the
Company has discretion in establishing prices.
Direct Operating Costs
Direct operating costs primarily include third-party expenses
associated with the production of events and experiences, content
production costs, operations of the Company’s training and
education facilities and fees for media rights, including required
payments related to media sales agency contracts when minimum sales
guarantees are not met.
In 2018, 2019 and 2020, costs associated with certain acquired
media rights are in excess of revenue related to those rights. The
future expected losses on such contracts will be recognized in the
consolidated statements of operations over the term of the
respective contract.
Selling, General and Administrative
Selling, general and administrative expenses primarily include
personnel costs as well as rent, professional service costs and
other overhead required to support the Company’s operations
and corporate structure.
Insurance Recoveries
The Company maintains events cancellation insurance coverage. Upon
the cancellation of an event, the associated deferred event costs
are recognized in direct operating costs. An insurance recovery is
accrued when it is deemed probable an associated insurance claim
will cover such costs, under a loss recovery model. The portion of
an insurance claim in excess of costs incurred is recognized upon
approval of the claim or upon settlement, under a gain contingency
model.
Cash and Cash Equivalents
Cash and cash equivalents include demand deposits and highly liquid
money market accounts with original maturities of three months or
less at the time of purchase.
Restricted Cash
Restricted cash primarily includes cash held in trust on behalf of
clients, which has a corresponding liability called deposits
received on behalf of clients in the consolidated balance
sheets.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to
concentrations of credit risk consist primarily of cash and cash
equivalents and accounts receivable. Cash and cash equivalents are
maintained with various major banks and other high-quality
financial institutions. The Company periodically evaluates the
relative credit standings of these banks and financial
institutions. The Company’s accounts receivable are typically
unsecured and concentrations of credit risk with respect to
accounts receivable are limited due to the large number of
individuals and entities comprising the Company’s client
base.
As of December 31, 2019 and 2020, no single customer accounted
for 10% or more of the Company’s accounts receivable. For the
year ended December 31, 2018, no single customer accounted for
10% or more of the Company’s revenue. For the years ended
December 31, 2019 and 2020, there was one customer who
accounted for more than 10% of the Company’s revenue.
Accounts Receivable
Accounts receivable are recorded at net realizable value. Accounts
receivable are presented net of an allowance for doubtful accounts,
which is an estimate of expected losses. In determining the amount
of the reserve, the Company makes judgments about the
creditworthiness of significant customers based on known delinquent
activity or disputes and ongoing credit evaluations in addition to
evaluating the historical loss rate on the pool of receivables.
Accounts receivable includes unbilled receivables, which are
established when revenue is recognized, but due to contractual
restraints over the timing of invoicing, the Company does not have
the right to invoice the customer by the balance sheet date.
Deferred Costs
Deferred costs principally relate to payments made to third-party
vendors in advance of events taking place, including ticket
inventory, upfront contractual payments and prepayments on media
and licensing rights fees and advancements for content production
or overhead costs. These costs are recognized when the event takes
place or over the respective period of the media and licensing
rights.
Property and Equipment
Property and equipment are stated at historical cost less
accumulated depreciation. Depreciation is charged against income
over the estimated useful lives of the assets using the
straight-line method. The estimated useful lives of property and
equipment are as follows:
Buildings 35-40
Leasehold improvements
Lesser of useful life or lease term
Furniture, fixtures, office and other equipment 2-28.5
Production equipment 3-5
Computer hardware and software 2-5
Costs of normal repairs and maintenance are charged to expense as
incurred.
Leases
Effective January 1, 2019, the Company adopted ASC Topic 842,
Leases non-lease
The Company determines whether a contract contains a lease at
contract inception. The right-of-use right-of-use
Business Combinations
The Company accounts for acquisitions in which it obtains control
of one or more businesses as a business combination. The purchase
price of the acquired businesses, including management’s
estimation of the fair value of any contingent consideration, is
allocated to the tangible and intangible assets acquired and
liabilities assumed based on their estimated fair values at the
acquisition date. The excess of the purchase price over those fair
values is recognized as goodwill. During the measurement period,
which may be up to one year from the acquisition
date, the Company may record adjustments, in the period in which
they are determined, to the assets acquired and liabilities assumed
with the corresponding offset to goodwill. Upon the conclusion of
the measurement period or final determination of the values of
assets acquired or liabilities assumed, whichever comes first, any
subsequent adjustments are recognized in the consolidated
statements of operations.
Goodwill
Goodwill is tested annually as of October 1 for impairment and
at any time upon the occurrence of certain events or substantive
changes in circumstances that indicate the carrying amount of
goodwill may not be recoverable. The Company has the option to
perform a qualitative assessment to determine if an impairment is
“more likely than not” to have occurred. If the Company
can support the conclusion that the fair value of a reporting unit
is greater than its carrying amount under the qualitative
assessment, the Company would not need to perform the quantitative
impairment test for that reporting unit. If the Company cannot
support such a conclusion or the Company does not elect to perform
the qualitative assessment, then the Company must perform the
quantitative impairment test. During the fourth quarter of 2019,
the Company early adopted ASU 2017-04, Intangibles—Goodwill
and Other (Topic 350): Simplifying the Test for Goodwill
Impairment 2017-04”), 2017-04, one-step
Intangible Assets
Intangible assets consist primarily of trade names and customer and
client relationships. Intangible assets with finite lives are
recorded at their estimated fair value at the date of acquisition
and are amortized over their estimated useful lives using the
straight-line method. The estimated useful lives of finite-lived
intangible assets are as follows:
Trade names 2-20 years
Customers and client relationships 2-22
Internally developed technology 2-9
Other 2-5
For intangible assets that are amortized, the Company evaluates
assets for recoverability when there is an indication of potential
impairment or when the useful lives are no longer appropriate. If
the undiscounted cash flows from a group of assets being evaluated
is less than the carrying value of that group of assets, the fair
value of the asset group is determined and the carrying value of
the asset group is written down to fair value and an impairment
loss is recognized for the difference between the fair value and
carrying value, which is recorded in impairment charges in the
consolidated statements of operations.
Identifiable indefinite-lived intangible assets are tested annually
for impairment as of October 1 and at any time upon the
occurrence of certain events or substantive changes in
circumstances that indicate the carrying amount of an
indefinite-lived intangible may not be recoverable. The Company has
the option to perform a qualitative assessment to determine if an
impairment is “more likely than not” to have occurred.
In the qualitative assessment, the Company must evaluate the
totality of qualitative factors, including any recent fair value
measurements, that impact whether an indefinite-lived intangible
asset has a carrying amount that “more likely than not”
exceeds its fair value. The Company must then conduct a
quantitative analysis if the Company (1) determines that such
an impairment is “more likely than not” to exist, or
(2) forgoes the qualitative assessment entirely. The
impairment test for identifiable indefinite-lived intangible assets
consists of a comparison of the estimated fair value of the
intangible asset with its carrying value. If the carrying value of
the intangible asset exceeds its fair value, an impairment loss is
recognized in an amount equal to that excess and is recorded in
impairment charges in the consolidated statements of
operations.
Investments
For equity method investments, the Company periodically reviews the
carrying value of its investments to determine if there has been an
other-than-temporary decline in fair value below carrying value.
For equity investments without readily determinable fair value, the
Company performs a qualitative assessment at each reporting period.
A variety of factors are considered when determining if an
impairment exists, including, among others, the financial condition
and business prospects of the investee, as well as the
Company’s investment intent.
Content Costs
Effective July 1, 2019, the Company early adopted FASB
Accounting Standards Update (“ASU”) 2019-02, Entertainment—Films—Other Assets—Film Costs
(Subtopic 926-20) 920-350): 2019-02”) 2019-02
The Company incurs costs to produce and distribute film and
television content, which are either monetized on a title-by-title title-by-title
For content costs that are predominantly monetized on a
title-by-title
Debt Issuance Costs
Costs incurred in connection with the issuance of the
Company’s long-term debt have been recorded as a direct
reduction against the debt, and amortized over the life of the
associated debt as a component of interest expense using the
effective interest method. Costs incurred with the issuance of the
Company’s revolving credit facilities have been deferred and
amortized over the term of the facilities as a component of
interest expense using the straight-line method. These deferred
costs are included in other assets in the consolidated balance
sheets.
Fair Value Measurements
The Company accounts for certain assets and liabilities at fair
value. Fair value measurements are categorized within a fair value
hierarchy, which is comprised of three categories. Categorization
within the fair value hierarchy is based on the lowest level of
input that is significant to the fair value measurement.
The carrying values reported in the consolidated balance sheets for
cash and cash equivalents, restricted cash, accounts receivable,
accounts payable, accrued liabilities and deposits received on
behalf of clients approximate fair value because of the immediate
or short-term maturities of these financial instruments.
The Company’s assets measured at fair value on a nonrecurring
basis include investments, long-lived assets, indefinite-lived
intangible assets and goodwill. These assets are not measured and
adjusted to fair value on an ongoing basis but are subject to
periodic evaluations for potential impairment (Notes 8 and 9). The
resulting fair value measurements of the assets are considered to
be Level 3 measurements.
Distributions to Members
Members of the Company, a limited liability company
(“LLC”), are eligible to receive annual distributions
based on the distribution priority outlined in the Company’s
amended and restated LLC agreement (the “Operating
Agreement”). Holdco is entitled to certain priority
distributions. Holdco then allocates these annual distributions to
members of Holdco not on a pro-rata
After the distributions to Holdco, the Company’s other
Class A Common unitholders are entitled to certain
“catch up” distributions, which are made in cash,
additional Class A Common Units or a combination thereof, as
applicable, as set forth in the Operating Agreement.
Non-controlling
Non-controlling non-controlling non-controlling
Non-controlling non-controlling non-controlling non-controlling non-controlling
non-controlling
Equity-Based Compensation
Equity-based compensation is accounted for in accordance with ASC
Topic 718-10, Compensation-Stock Compensation
Income Taxes
The Company is a LLC, which is treated as a partnership for U.S.
federal and state income tax purposes and is therefore not subject
to U.S. corporate income taxes. The Company’s income,
except for the corporate subsidiaries, is subject to tax at the
partner level. The Company’s U.S. and foreign corporate
subsidiaries are subject to entity-level taxes. The Company
also is subject to entity-level income taxes in certain U.S. state
and local jurisdictions.
The Company’s corporate subsidiaries account for income taxes
under the asset and liability method in accordance with ASC Topic
740, Income Taxes
ASC 740 prescribes a minimum probability threshold that a tax
position must meet before a financial statement benefit is
recognized. The minimum threshold is defined as a tax position that
is “more likely than not” to be sustained upon
examination by the applicable taxing authority, including
resolution of any related appeals or litigation processes, based on
the technical merits of the position. The tax benefit to be
recognized is measured as the largest amount of benefit that is
greater than 50% likely of being realized upon ultimate settlement.
To the extent the Company prevails in matters for which a liability
for an unrecognized tax benefit is established or is required to
pay amounts in excess of the liability, the Company’s
effective tax rate in a given financial statement period may be
affected.
The Company recognizes interest and penalties related to
unrecognized tax benefits on the income tax expense line in the
consolidated statements of operations. Accrued interest and
penalties are included in the related tax liability line in the
consolidated balance sheets.
Derivative Instruments and Hedging Activities
Derivative financial instruments are used by the Company in the
management of its foreign currency exposures and interest rate
risks. The Company’s policy is not to use derivative
financial instruments for trading or speculative purposes.
The Company enters into forward foreign exchange contracts to hedge
its foreign currency exposure on future production expenses
denominated in various foreign currencies as well as to
economically hedge certain of its foreign currency risks. In
addition, the Company enters into interest rate swaps to hedge
certain of its interest rate risks. The Company evaluates whether
its derivative financial instruments qualify for hedge accounting
at the inception of the contract. The fair value of the derivative
financial instrument is recorded in the consolidated balance
sheets. Changes in the fair value of the derivative financial
instruments that are designated for hedge accounting are reflected
in accumulated other comprehensive income (loss), a separate
component of members’ equity, and changes in the fair value
of the derivative financial instruments that are not designated for
hedge accounting are reflected in the consolidated statements of
operations. Gains and losses reflected in accumulated other
comprehensive income (loss) for production expenses are amortized
to the consolidated statements of operations on the same basis as
the production expenses being hedged and for interest rate swaps
are recognized in interest expense on settlement.
Foreign Currency
The Company has operations outside of the United States. Therefore,
changes in the value of foreign currencies affect the consolidated
financial statements when translated into U.S. Dollars. The
functional currency for substantially all subsidiaries outside the
U.S. is the local currency. Financial statements for these
subsidiaries are translated into U.S. Dollars at period end
exchange rates as to the assets and liabilities and monthly average
exchange rates as to revenue, expenses and cash flows. For these
countries, currency translation adjustments are recognized in
members’ equity as a component of accumulated other
comprehensive income (loss), whereas transaction gains and losses
are recognized in other income (expense), net in the consolidated
statements of operations. The Company
recognized $7.6 million, $4.2 million and
$2.1 million of realized and unrealized foreign currency
transaction losses for the years ended December 31, 2018,
2019 and 2020, respectively. |
