| SIGNIFICANT ACCOUNTING POLICIES (Policies) | 12 Months Ended |
| Dec. 31, 2017 |
| SIGNIFICANT ACCOUNTING POLICIES | |
| Principles of Consolidation | Principles of Consolidation
The consolidated financial statements include the accounts of the Company and all subsidiaries in which the Company has a controlling financial interest. Investments in companies, joint ventures or partnerships in which the Company does not have control, but has the ability to exercise significant influence over operating and financial policies, are reported using the equity method. Effective as of the end of the fourth quarter of 2015, the Company determined it did not meet the accounting criteria for control over its Venezuelan subsidiaries. Therefore, the Company deconsolidated its Venezuelan subsidiaries effective as of the end of the fourth quarter of 2015, and began accounting for the investments in its Venezuelan subsidiaries using the cost method of accounting, effective in the first quarter of 2016. The cost method of accounting is used in circumstances where the Company has no substantial influence over the investee, and the investment has no easily determinable fair value. International subsidiaries are included in the financial statements on the basis of their U.S. GAAP November 30 fiscal year-ends to facilitate the timely inclusion of such entities in the Company’s consolidated financial reporting. All intercompany transactions and profits are eliminated in consolidation. |
| Use of Estimates | Use of Estimates
The preparation of the Company’s financial statements requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from these estimates. The Company’s critical accounting estimates include revenue recognition, valuation allowances and accrued liabilities, actuarially determined liabilities, restructuring, income taxes and long-lived assets, intangible assets and goodwill. |
| Foreign Currency Translation | Foreign Currency Translation
Financial position and reported results of operations of the Company’s non-U.S. dollar functional international subsidiaries are measured using local currencies as the functional currency. Assets and liabilities of these operations are translated at the exchange rates in effect at each fiscal year end. The translation adjustments related to assets and liabilities that arise from the use of differing exchange rates from period to period are included in accumulated other comprehensive income (loss) in shareholders’ equity. Income statement accounts are translated at average rates of exchange prevailing during the year. As discussed in Note 17 Operating Segments and Geographic Information, the Company evaluates its international operations based on fixed rates of exchange; however, the different exchange rates from period to period impact the amount of reported income from consolidated operations. |
| Concentration of Credit Risk | Concentration of Credit Risk
Credit risk represents the accounting loss that would be recognized at the reporting date if counterparties failed to perform as contracted. The Company believes the likelihood of incurring material losses due to concentration of credit risk is remote. The principal financial instruments subject to credit risk are as follows:
Cash and Cash Equivalents - The Company maintains cash deposits with major banks, which from time to time may exceed insured limits. The possibility of loss related to financial condition of major banks has been deemed minimal. Additionally, the Company’s investment policy limits exposure to concentrations of credit risk and changes in market conditions.
Accounts Receivable - A large number of customers in diverse industries and geographies, as well as the practice of establishing reasonable credit lines, limits credit risk. Based on historical trends and experiences, the allowance for doubtful accounts is adequate to cover potential credit risk losses.
Foreign Currency and Interest Rate Contracts and Derivatives - Exposure to credit risk is limited by internal policies and active monitoring of counterparty risks. In addition, the Company uses a diversified group of major international banks and financial institutions as counterparties. The Company does not anticipate nonperformance by any of these counterparties. |
| Cash and Cash Equivalents | Cash and Cash Equivalents
Cash equivalents include highly-liquid investments with a maturity of three months or less when purchased. |
| Accounts Receivable and Allowance For Doubtful Accounts | Accounts Receivable and Allowance For Doubtful Accounts
Accounts receivable are carried at the invoiced amounts, less an allowance for doubtful accounts, and generally do not bear interest. The Company estimates the balance of allowance for doubtful accounts by analyzing accounts receivable balances by age and applying historical write-off and collection trend rates. The Company’s estimates include separately providing for customer receivables based on specific circumstances and credit conditions, and when it is deemed probable that the balance is uncollectible. Account balances are written off against the allowance when it is determined the receivable will not be recovered.
The Company’s allowance for doubtful accounts balance also includes an allowance for the expected return of products shipped and credits related to pricing or quantities shipped of $15 million, $14 million and $15 million as of December 31, 2017, 2016, and 2015, respectively. Returns and credit activity is recorded directly to sales as a reduction.
The following table summarizes the activity in the allowance for doubtful accounts:
(millions)
2017
2016
2015
Beginning balance
$67.6
$75.3
$77.5
Bad debt expense
17.1
20.1
25.8
Write-offs
(15.7)
(24.6)
(21.9)
Other (a)
2.5
(3.2)
(6.1)
Ending balance
$71.5
$67.6
$75.3
(a)
Other amounts are primarily the effects of changes in currency translations and the impact of allowance for returns and credits. |
| Inventory Valuations | Inventory Valuations
Inventories are valued at the lower of cost or net realizable value. Certain U.S. inventory costs are determined on a last-in, first-out (“LIFO”) basis. LIFO inventories represented 39% and 40% of consolidated inventories as of December 31, 2017 and 2016, respectively. All other inventory costs are determined using either the average cost or first-in, first-out (“FIFO”) methods. Inventory values at FIFO, as shown in Note 5, approximate replacement cost. |
| Property, Plant and Equipment | Property, Plant and Equipment
Property, plant and equipment assets are stated at cost. Merchandising and customer equipment consists principally of various dispensing systems for the Company’s cleaning and sanitizing products, dishwashing machines and process control and monitoring equipment. Certain dispensing systems capitalized by the Company are accounted for on a mass asset basis, whereby equipment is capitalized and depreciated as a group and written off when fully depreciated. The Company capitalizes both internal and external costs of development or purchase of computer software for internal use. Costs incurred for data conversion, training and maintenance associated with capitalized software are expensed as incurred. Expenditures for major renewals and improvements, which significantly extend the useful lives of existing plant and equipment, are capitalized and depreciated. Expenditures for repairs and maintenance are charged to expense as incurred. Upon retirement or disposition of plant and equipment, the cost and related accumulated depreciation are removed from the accounts and any resulting gain or loss is recognized in income.
Depreciation is charged to operations using the straight-line method over the assets’ estimated useful lives ranging from 5 to 40 years for buildings and leasehold improvements, 3 to 20 years for machinery and equipment, 3 to 15 years for merchandising and customer equipment and 3 to 7 years for capitalized software. The straight-line method of depreciation reflects an appropriate allocation of the cost of the assets to earnings in proportion to the amount of economic benefits obtained by the Company in each reporting period. Depreciation expense was $586 million, $561 million and $560 million for 2017, 2016 and 2015, respectively. |
| Goodwill | Goodwill
Goodwill represents the excess of the purchase price over the fair value of identifiable net assets acquired in a business combination. The Company’s reporting units are its operating segments.
During the second quarter of 2017, the Company completed its scheduled annual assessment for goodwill impairment across its eleven reporting units through a quantitative analysis, utilizing a discounted cash flow approach, which incorporates assumptions regarding future growth rates, terminal values, and discount rates. The two-step quantitative process involved comparing the estimated fair value of each reporting unit to the reporting unit’s carrying value, including goodwill. If the fair value of a reporting unit exceeds its carrying value, goodwill of the reporting unit is considered not to be impaired, and the second step of the impairment test is unnecessary. If the carrying amount of the reporting unit exceeds its fair value, the second step of the goodwill impairment test would be performed to measure the amount of impairment loss to be recorded, if any. The Company’s goodwill impairment assessment for 2017 indicated the estimated fair value of each of its reporting units exceeded its carrying amount by a significant margin.
If circumstances change significantly, the Company would also test a reporting unit’s goodwill for impairment during interim periods between its annual tests. There has been no impairment of goodwill in any of the years presented. In the fourth quarter of 2017, the Company sold the Equipment Care business, which was a reporting unit, and the goodwill associated with Equipment Care was disposed of upon sale. No other events occurred during the second half of 2017 that indicated a need to update the Company’s conclusions reached during the second quarter of 2017.
The changes in the carrying amount of goodwill for each of the Company’s reportable segments are as follows:
Global
Global
Global
(millions)
Industrial
Institutional
Energy
Other
Total
December 31, 2015
$2,560.8
$662.7
$3,151.5
$115.8
$6,490.8
Segment change (a)
62.7
(62.7)
-
-
-
December 31, 2015 revised
$2,623.5
$600.0
$3,151.5
$115.8
$6,490.8
Current year business combinations (b)
-
3.1
0.6
-
3.7
Prior year business combinations (c)
3.5
-
0.1
-
3.6
Reclassifications (d)
3.5
(0.6)
(2.9)
-
-
Effect of foreign currency translation
(45.5)
(2.1)
(115.1)
December 31, 2016
$2,585.0
$590.7
$3,093.6
$113.7
$6,383.0
Current year business combinations (b)
123.4
403.7
8.1
63.9
599.1
Prior year business combinations (c)
(0.2)
-
0.3
-
0.1
Dispositions
-
-
-
(42.6)
(42.6)
Effect of foreign currency translation
88.8
32.6
101.7
4.4
227.5
December 31, 2017
$2,797.0
$1,027.0
$3,203.7
$139.4
$7,167.1
(a)
Relates to establishment of the Life Sciences reporting unit in the first quarter of 2017, and goodwill being allocated to Life Sciences based on a fair value allocation of goodwill. The Life Sciences reporting unit is included in the Industrial reportable segment and is comprised of operations previously recorded in the Food & Beverage and Healthcare reporting units, which are aggregated and reported in the Global Industrial and Global Institutional reportable segments, respectively. See Note 17 for further information.
(b)
For 2017, the Company expects $79.2 million of the goodwill related to businesses acquired to be tax deductible. For 2016, $3.0 million of the goodwill related to businesses acquired is expected to be tax deductible.
(c)
Represents purchase price allocation adjustments for acquisitions deemed preliminary as of the end of the prior year.
(d)
Represents immaterial reclassifications of beginning balances to conform to the current or prior year presentation due to customer reclassifications across reporting segments completed in the first quarter of the respective year. |
| Other Intangible Assets | Other Intangible Assets
The Nalco trade name is the Company’s principal indefinite life intangible asset. During the second quarter of 2017, the Company completed its annual test for indefinite life intangible asset impairment using a relief from royalty method of assessment, which incorporates assumptions regarding future sales projections and discount rates. Based on this testing, the estimated fair value of the asset exceeded its carrying value by a significant margin, therefore, no adjustment to the $1.2 billion carrying value of this asset was necessary. Additionally, no events during the second half of 2017 indicated a need to update the Company’s conclusions reached during the second quarter of 2017. There has been no impairment of the Nalco trade name intangible asset since it was acquired.
The Company’s intangible assets subject to amortization primarily include customer relationships, trademarks, patents and other technology. The fair value of identifiable intangible assets is estimated based upon discounted future cash flow projections and other acceptable valuation methods. Other intangible assets are amortized on a straight-line basis over their estimated economic lives. The weighted-average useful life of amortizable intangible assets was 14 years as of both December 31, 2017 and 2016.
The weighted-average useful life by type of amortizable asset at December 31, 2017 is as follows:
(years)
Customer relationships
14
Trademarks
14
Patents
14
Other technology
6
The straight-line method of amortization reflects an appropriate allocation of the cost of the intangible assets to earnings in proportion to the amount of economic benefits obtained by the Company in each reporting period. The Company evaluates the remaining useful life of its intangible assets that are being amortized each reporting period to determine whether events and circumstances warrant a change to the remaining period of amortization. If the estimate of an intangible asset’s remaining useful life is changed, the remaining carrying amount of the intangible asset will be amortized prospectively over that revised remaining useful life. Total amortization expense related to other intangible assets during the last three years and future estimated amortization is as follows:
(millions)
2015
$ 292
2016
290
2017
308
2018
315
2019
302
2020
297
2021
292
2022
286 |
| Long-Lived Assets | Long-Lived Assets
The Company periodically reviews its long-lived and amortizable intangible assets for impairment and assesses whether significant events or changes in business circumstances indicate that the carrying value of the assets may not be recoverable. Such circumstances may include a significant decrease in the market price of an asset, a significant adverse change in the manner in which the asset is being used or in its physical condition or history of operating or cash flow losses associated with the use of an asset. An impairment loss may be recognized when the carrying amount of an asset exceeds the anticipated future undiscounted cash flows expected to result from the use of the asset and its eventual disposition. The amount of the impairment loss to be recorded, if any, is calculated by the excess of the asset’s carrying value over its fair value. During 2017, the Company impaired certain long-lived assets related to a portion of one of its businesses. During 2016, the Company impaired certain long-lived assets related to a product line within one of its U.S. plants. In 2015, as part of the actions taken regarding its Venezuelan businesses, the Company wrote-off customer relationship intangible assets and other long-lived assets. See Note 3 for additional information regarding these asset impairments.
In addition, the Company periodically reassesses the estimated remaining useful lives of its long-lived assets. Changes to estimated useful lives would impact the amount of depreciation and amortization recorded in earnings. The Company has not experienced significant changes in the carrying value or estimated remaining useful lives of its long-lived or amortizable intangible assets. |
| Income Taxes | Income Taxes
Income taxes are recognized during the period in which transactions enter into the determination of financial statement income, with deferred income taxes provided for the tax effect of temporary differences between the carrying amount of assets and liabilities and their tax bases. The Company records a valuation allowance to reduce its deferred tax assets when uncertainty regarding their realizability exists. The Company records liabilities for income tax uncertainties in accordance with the U.S. GAAP recognition and measurement criteria guidance.
On December 22, 2017, the President of the United States signed into law the Tax Cuts and Jobs Act (the “Act”), which reduces the U.S. federal corporate tax rate from 35% to 21%, requires companies to pay a one-time transition tax on earnings of certain foreign subsidiaries that were previously tax deferred and creates new taxes on certain foreign sourced earnings.
The Tax Act adds many new provisions including changes to bonus depreciation, the deduction for executive compensation and interest expense, a tax on global intangible low taxed income (GILTI), the base erosion anti abuse tax (BEAT) and a deduction for foreign derived intangible income (FDII). Some of these provisions, such as the tax on GILTI, may not apply to the Company with full effect until future years.
The SEC staff issued Staff Accounting Bulletin (SAB 118), which provides guidance on accounting for enactment effects of the Tax Act. SAB 118 provides a measurement period of up to one year from the Tax Act’s enactment date for companies to complete their accounting. In accordance with SAB 118, to the extent that a company’s accounting for certain income tax effects of the Tax Act is incomplete but it is able to determine a reasonable estimate, it must record a provisional estimate in the financial statements. If a company cannot determine a provisional estimate to be included in its financial statements, it should continue to account for the provisions of the tax laws that were in effect immediately before enactment of the Tax Act. The Company has reported provisional amounts for the income tax effects that included the reporting period the Tax Act was enacted.
The two principle elements impacting the 2017 financial statements are the reduction in the tax rate and the one-time tax that is imposed on our unremitted foreign earnings. The Company has accounted for the impacts of the Tax Act to the extent a reasonable estimate could be made, and will continue to refine its estimates throughout the measurement period or until the accounting is complete. The Company is assessing the impact of the provisions of the Act which impact the Company in future years, and has not made a reasonable estimate of its related effects.
See Note 12 for additional information regarding income taxes. |
| Share-Based Compensation | Share-Based Compensation
During the first quarter of 2017, the Company adopted the accounting guidance issued in March 2016 that amends certain aspects of share-based compensation for employees, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classifications on the Consolidated Statement of Cash Flows. Under the new guidance, all excess tax benefits or deficiencies are to be recognized prospectively as discrete income tax items on the Consolidated Statement of Income, while previous guidance required realized excess tax benefits or deficiencies to be recognized in additional paid-in capital. The Company recorded $39.7 million of excess tax benefits during 2017. The extent of excess tax benefits is subject to variation in stock price and stock option exercises. Adoption of the accounting standard also eliminated the requirement that excess tax benefits be realized before they can be recognized, and as a result, the Company recorded a $1.9 million cumulative-effect adjustment for previously unrecognized excess tax benefits.
The Company’s adoption also resulted in associated excess tax benefits being classified as an operating activity in the statement of cash flows prospectively beginning January 1, 2017 with no changes to the prior year. Based on the adoption methodology applied, employee taxes paid remain classified as a financing activity on the statement of cash flows, and the statement of cash flows classification of prior periods has not changed. With regards to forfeitures, the new guidance allows companies either to continue to estimate the number of awards that will be forfeited or to account for forfeitures as they occur. The Company has elected to continue to estimate the number of awards that will be forfeited based on an estimate of the number of outstanding awards expected to vest.
See Note 11 for additional information regarding equity compensation plans. |
| Restructuring Activities | Restructuring Activities
The Company’s restructuring activities are associated with plans to enhance its efficiency, effectiveness and sharpen its competitiveness. These restructuring plans include net costs associated with significant actions involving employee-related severance charges, contract termination costs and asset write-downs and disposals. Employee termination costs are largely based on policies and severance plans, and include personnel reductions and related costs for severance, benefits and outplacement services. These charges are reflected in the quarter in which the actions are probable and the amounts are estimable, which typically is when management approves the associated actions. Contract termination costs include charges to terminate leases prior to the end of their respective terms and other contract termination costs. Asset write-downs and disposals include leasehold improvement write-downs, other asset write-downs associated with combining operations and disposal of assets.
See Note 3 for additional information regarding restructuring. |
| Revenue Recognition | Revenue Recognition
The Company recognizes revenue on product sales at the time evidence of an arrangement exists, title to the product and risk of loss transfers to the customer, the price is fixed and determinable and collection is reasonably assured. The Company recognizes revenue on services as they are performed. While the Company employs a sales and service team to ensure customer’s needs are best met in a high quality way, the majority of the Company’s revenue is generated from product sales. The Company’s service businesses and service offerings are discussed in Note 17.
The Company’s sales policies do not provide for general rights of return. Estimates used in recognizing revenue include the delay between the time that products are shipped and when they are received by customers, when title transfers and the amount of credit memos issued in subsequent periods. The Company records estimated reductions to revenue for customer programs and incentive offerings, including pricing arrangements, promotions and other volume-based incentives at the time the sale is recorded. The Company also records estimated reserves for anticipated uncollectible accounts and for product returns and credits at the time of sale. Depending on market conditions, the Company may increase customer incentive offerings, which could reduce gross profit margins over the term of the incentive.
On January 1, 2018, the Company adopted Accounting Standards Committee 606 (ASC 606), Revenue from Contracts with Customers, which provides guidance on how revenue with customers should be recognized. See the “New Accounting Pronouncements” table within this Note for discussion on future changes to revenue recognition. |
| Earnings Per Common Share | Earnings Per Common Share
The difference in the weighted average common shares outstanding for calculating basic and diluted earnings attributable to Ecolab per common share is a result of the dilution associated with the Company’s equity compensation plans. As noted in the table below, certain stock options and units outstanding under these equity compensation plans were not included in the computation of diluted earnings attributable to Ecolab per common share because they would not have had a dilutive effect.
The computations of the basic and diluted earnings attributable to Ecolab per share amounts were as follows:
(millions, except per share)
2017
2016
2015
Net income attributable to Ecolab
$1,508.4
$1,229.6
$1,002.1
Weighted-average common shares outstanding
Basic
289.6
292.5
296.4
Effect of dilutive stock options and units
4.4
4.2
5.0
Diluted
294.0
296.7
301.4
Basic EPS
$ 5.21
$ 4.20
$ 3.38
Diluted EPS
$ 5.13
$ 4.14
$ 3.32
Anti-dilutive securities excluded from the computation of EPS
3.4
3.6
3.5 |
| Fair value measurements | The Company’s financial instruments include cash and cash equivalents, restricted cash, accounts receivable, accounts payable, contingent consideration obligations, commercial paper, notes payable, foreign currency forward contracts, interest rate swap agreements and long-term debt.
Fair value is defined as the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants as of the measurement date. A hierarchy has been established for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring the most observable inputs be used when available. The hierarchy is broken down into three levels:
Level 1 - Inputs are quoted prices in active markets that are accessible at the measurement date for identical assets or liabilities.
Level 2 - Inputs include observable inputs other than quoted prices in active markets.
Level 3 - Inputs are unobservable inputs for which there is little or no market data available. |
| Derivatives and hedging transactions | The Company uses foreign currency forward contracts, interest rate swap agreements and foreign currency debt to manage risks associated with foreign currency exchange rates, interest rates and net investments in foreign operations. The Company does not hold derivative financial instruments of a speculative nature or for trading purposes. The Company records derivatives as assets and liabilities on the balance sheet at fair value. Changes in fair value are recognized immediately in earnings unless the derivative qualifies and is designated as a hedge. Cash flows from derivatives are classified in the statement of cash flows in the same category as the cash flows from the items subject to designated hedge or undesignated (economic) hedge relationships. The Company evaluates hedge effectiveness at inception and on an ongoing basis. If a derivative is no longer expected to be effective, hedge accounting is discontinued. Hedge ineffectiveness, if any, is recorded in earnings.
The Company is exposed to credit risk in the event of nonperformance of counterparties for foreign currency forward exchange contracts and interest rate swap agreements. The Company monitors its exposure to credit risk by using credit approvals and credit limits and by selecting major international banks and financial institutions as counterparties. The Company does not anticipate nonperformance by any of these counterparties, and therefore, recording a valuation allowance against the Company’s derivative balance is not considered necessary. |
| Share-based compensation | The Company measures compensation expense for share-based awards at fair value at the date of grant and recognizes compensation expense over the service period for awards expected to vest. The majority of grants to retirement eligible recipients (age 55 with required years of service) are attributed to expense using the non-substantive vesting method and are fully expensed over a six month period following the date of grant. In addition, the Company includes a forfeiture estimate in the amount of compensation expense being recognized based on an estimate of the number of outstanding awards expected to vest. |
| Research and development expenditures | Research expenditures that relate to the development of new products and processes, including significant improvements and refinements to existing products, are expensed as incurred. |
| Legal contingencies | The Company is subject to various claims and contingencies related to, among other things, workers’ compensation, general liability (including product liability), automobile claims, health care claims, environmental matters and lawsuits. The Company is also subject to various claims and contingencies related to income taxes, which are discussed in Note 12. The Company also has contractual obligations including lease commitments, which are discussed in Note 13.
The Company records liabilities where a contingent loss is probable and can be reasonably estimated. If the reasonable estimate of a probable loss is a range, the Company records the most probable estimate of the loss or the minimum amount when no amount within the range is a better estimate than any other amount. The Company discloses a contingent liability even if the liability is not probable or the amount is not estimable, or both, if there is a reasonable possibility that a material loss may have been incurred.
Insurance
Globally, the Company has insurance policies with varying deductibility levels for property and casualty losses. The Company is insured for losses in excess of these deductibles, subject to policy terms and conditions and has recorded both a liability and an offsetting receivable for amounts in excess of these deductibles. The Company is self-insured for health care claims for eligible participating employees, subject to certain deductibles and limitations. The Company determines its liabilities for claims on an actuarial basis.
Litigation and Environmental Matters
The Company and certain subsidiaries are party to various lawsuits, claims and environmental actions that have arisen in the ordinary course of business. These include from time to time antitrust, commercial, patent infringement, product liability and wage hour lawsuits, as well as possible obligations to investigate and mitigate the effects on the environment of the disposal or release of certain chemical substances at various sites, such as Superfund sites and other operating or closed facilities. The Company has established accruals for certain lawsuits, claims and environmental matters. The Company currently believes that there is not a reasonably possible risk of material loss in excess of the amounts accrued related to these legal matters. Because litigation is inherently uncertain, and unfavorable rulings or developments could occur, there can be no certainty that the Company may not ultimately incur charges in excess of recorded liabilities. A future adverse ruling, settlement or unfavorable development could result in future charges that could have a material adverse effect on the Company’s results of operations or cash flows in the period in which they are recorded. The Company currently believes that such future charges related to suits and legal claims, if any, would not have a material adverse effect on the Company’s consolidated financial position. |
| Pension and post-retirement benefit plans | The Company has a non-contributory qualified defined benefit pension plan covering the majority of its U.S. employees. The Company also has non-contributory non-qualified defined benefit plans, which provide for benefits to employees in excess of limits permitted under its U.S. pension plans. Various international subsidiaries have defined benefit pension plans. The Company provides postretirement health care benefits to certain U.S. employees and retirees.
The non-qualified plans are not funded and the recorded benefit obligation for the non-qualified plans was $124 million and $125 million at December 31, 2017 and 2016, respectively. The measurement date used for determining the U.S. pension plan assets and obligations is December 31.
International plans are funded based on local country requirements. The measurement date used for determining the international pension plan assets and obligations is November 30, the fiscal year-end of the Company’s international affiliates.
The U.S. postretirement health care plans are contributory based on years of service and choice of coverage (family or single), with retiree contributions adjusted annually. The measurement date used to determine the U.S. postretirement health care plan assets and obligations is December 31. Certain employees outside the U.S. are covered under government-sponsored programs, which are not required to be fully funded. The expense and obligation for providing international postretirement health care benefits are not significant. |
| Reportable segments | The Company’s organizational structure consists of global business unit and global regional leadership teams. The Company’s eleven operating segments (ten following the divestiture of the Equipment Care operating segment in 2017) follow its commercial and product-based activities and are based on engagement in business activities, availability of discrete financial information and review of operating results by the Chief Operating Decision Maker at the identified operating segment level.
Nine of the Company’s eleven operating segments have been aggregated into three reportable segments based on similar economic characteristics and future prospects, nature of the products and production processes, end-use markets, channels of distribution and regulatory environment. The Company’s reportable segments are Global Industrial, Global Institutional and Global Energy. The Company’s two operating segments, including Equipment Care prior to its sale in November 2017, that are primarily fee-for-service businesses have been combined into the Other segment and do not meet the quantitative criteria to be separately reported. The Company provides similar information for the Other segment as compared to its three reportable segments as the Company considers the information regarding its two underlying operating segments as useful in understanding its consolidated results. |
| New Accounting Pronouncements | New Accounting Pronouncements
Required
Date of
Date of
Effect on the
Standard
Issuance
Description
Adoption
Financial Statements
Standards that are not yet adopted:
ASU 2018-02 - Income Statement—Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income
February 2018
Amends ASC 220 to allow entities to reclassify stranded tax effects resulting from the Tax Cut and Jobs Act (“the Act”) from accumulated OCI to retained earnings. Tax effects stranded in OCI for reasons other than the impact of the Act cannot be reclassified.
January 1, 2019
The reclassification is optional and can be applied retrospectively or in the period of adoption. The Company is currently evaluating the impact of adoption.
ASU 2017-12 - Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities
August 2017
Amends the hedge accounting recognition and presentation requirements in ASC 815. Simplifies the guidance on the application of hedge accounting and the requirements for hedge documentation and effectiveness testing. Requires presentation of all items that affect earnings in the same income statement line as the hedged item.
January 1, 2019
The Company is currently evaluating the impact of adoption, and certain transition elections provided for by the ASU.
ASU 2017-09 - Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting
May 2017
Clarifies the definition of what's considered a substantive modification related to a change in terms or conditions of a share-based payment award and when it's appropriate to apply modification accounting. The current definition of "modification" is too broad, resulting in diverse interpretations of what's considered a substantive modification.
January 1, 2018
This ASU must be applied prospectively to an award modified on or after the adoption date. The Company has not historically modified awards, and will apply the modification guidance prospectively.
ASU 2017-07 - Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and the Net Periodic Postretirement Benefit Cost
March 2017
Amends the requirements related to income statement presentation of the components of net periodic benefit costs. New requirements include (1) disaggregate the current-service-cost component from the other components of net benefit cost (the “other components") and present it with other current compensation costs for related employees in the income statement and (2) present the other components elsewhere in the income statement and outside of income from operations if such a subtotal is presented.
January 1, 2018
Upon adoption of the standard, the Company will record only the service cost component with compensation cost in Cost of Sales and Selling, General, and Administrative costs. The other components of net period benefit cost will be presented below operating income. The Company will revise 2016 and 2017 financial statements, and as a result will reclassify $44 million and $67 million of income related to non-service components, respectively, below operating income.
ASU 2017-05 - Other Income - Gains and Losses from the Derecognition of Nonfinancial Assets (Topic 610-20): Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets
February 2017
Clarifies the scope of guidance on nonfinancial asset derecognition (ASC 610-20) including the accounting for partial sales of nonfinancial assets. The ASU defines "in-substance nonfinancial asset". Also clarifies the derecognition of all businesses should be accounted for in accordance with derecognition and deconsolidation guidance in 810-10.
January 1, 2018
The Company is required to apply this ASU on a retrospective basis. The Company is currently evaluating the impact of adoption. Adoption is not expected to have a material impact on the Company's financial statements.
ASU 2017-04 - Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment
January 2017
Simplifies subsequent measurement of goodwill by eliminating Step 2 from the goodwill impairment test. Step 2 measures a goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill.
January 1, 2020
The ASU must be applied on a prospective basis upon adoption. Adoption of the ASU is not expected to have a material impact on the Company's financial statements.
ASU 2017-01 - Business Combinations (Topic 805): Clarifying the Definition of a Business
January 2017
Clarifies the definition of a business and provides guidance on whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses.
January 1, 2018
The ASU must be applied prospectively on or after the effective date, and no disclosures are required at transition. The Company is currently evaluating the impact of adoption, and the ASU is not expected to have a material impact on the Company's financial statements.
ASU 2016-18 - Statement of Cash Flows (Topic 230): Restricted Cash
November 2016
Clarifies guidance on the classification and presentation of restricted cash in the statement of cash flows.
January 1, 2018
Presentation impact only related to restricted cash associated with the Anios acquisition. The Company will adopt the standard and restate the cash flow statement to align with the new guidance.
ASU 2016-16 - Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory
October 2016
Simplifies the guidance on the accounting for the income tax consequences of intra-entity transfers of assets other than inventory (e.g. intellectual property).
January 1, 2018
This ASU must be applied on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. The Company has deferred tax impacts associated primarily with transferring intellectual property (IP) between entities, which will be recognized upon adoption. Upon adoption, the Company expects to recognize approximately $43 million to beginning retained earnings, and record deferred tax assets of $2 million.
ASU 2016-15 - Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments
August 2016
The guidance's objective is to reduce diversity in practice of how certain cash receipts and cash payments are presented and classified in the statement of cash flow.
January 1, 2018
Presentation impact only related to eight specific cash flow items. Adoption and restatement of the cash flow statement for the new standard is not expected to be material.
ASU 2016-13 - Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments
June 2016
Addresses the recognition, measurement, presentation and disclosure of credit losses on trade and reinsurance receivables, loans, debt securities, net investments in leases, off-balance-sheet credit exposures and certain other instruments. Amends guidance on reporting credit losses from an incurred model to an expected model for assets held at amortized cost, such as accounts receivable, loans and held-to-maturity debt securities. Additional disclosures will also be required.
January 1, 2020
Adoption of the standard will change how the allowance for trade and other receivables is calculated. The Company is currently evaluating the impact of adoption.
Lease ASUs:
Various
Introduces the recognition of lease assets and lease liabilities by lessees for those leases classified as operating leases under previous guidance.
January 1, 2019
See additional information regarding the impact of this guidance on the Company's financial statements at the bottom of this table in note (a).
Revenue Recognition ASUs:
Various
Recognition standard contains principles for entities to apply to determine the measurement of revenue and timing of when the revenue is recognized. The underlying principle of the updated guidance will have entities recognize revenue to depict the transfer of goods or services to customers at an amount that is expected to be received in exchange for those goods or services.
January 1, 2018
See additional information regarding the impact of this guidance on the Company's financial statements at the bottom of this table in note (b).
(a)
As part of implementing the new lease standard, the Company is in process of reviewing current accounting policies, developing future policies, and assessing the practical expedients allowed under the new accounting guidance and proposed under the FASB’s tentative decision on November 29, 2017. The tentative decision relieves the requirements to restate comparative periods in the period of adoption and to separately disclose lease and nonlease components for lessor accounting when certain conditions are met. In addition, the project team is defining future processes to identify, accumulate, and report on the Company’s various leases. The Company expects most of its operating lease commitments will be subject to the new standard and recognized as operating lease liabilities and right-of-use assets upon adoption and is currently evaluating other impacts on the consolidated financial statements. The standard currently requires a modified retrospective transition to be applied at the beginning of the earliest comparative period presented in the year of adoption; however, this requirement may be relieved based upon the tentative decision noted above.
(b)
The Company adopted the new standard using the full retrospective method on January 1, 2018. The Company reached conclusions on key accounting assessments related to the standard and is finalizing the related accounting policies. The Company’s evaluation of performance obligations within certain contracts identified additional performance obligations which relate to providing services to customers. These additional performance obligations, when aggregated with the service revenue that is currently reported are expected to represent more than 10% of consolidated net sales. The Company will separately report revenue from service and leases, “Service Revenue”, from product revenues “Product Revenue” on the income statement. Additionally, certain costs currently classified in Selling, General, and Administrative expenses will be reclassified to Cost of Sales as they are tied to satisfaction of a service performance obligation. The impact of this reclassification is expected to be an increase in cost of sales, which is a decrease in gross margin of 400 bps – 600 bps. Adoption of the standard is not expected to have a material impact on net income or EPS. In addition to formalizing the additional disclosures associated with the new standard, the Company is finalizing the impact on the consolidated financial statements, including the impact of the prior year restatements.
Date of
Date of
Effect on the
Standard
Issuance
Description
Adoption
Financial Statements
Standards that were adopted:
ASU 2015-11 - Inventory (Topic 330): Simplifying the Measurement of Inventory
July 2015
The amendment requires entities to measure inventory under the FIFO or average cost methods at the lower of cost or net realizable value.
January 1, 2017
The adoption of the guidance did not have a material impact on the Company's financial statements.
ASU 2016-01 - Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities
January 2016
The amendment revises accounting related to the classification and measurement of investments in equity securities and the presentation of certain fair value changes for financial liabilities measured at fair value. The ASU also amends certain disclosure requirements associated with the fair value of financial instruments.
January 1, 2017
The adoption of the guidance did not have a material impact on the Company's financial statements.
ASU 2016-05 - Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships
March 2016
The amendment clarifies language related to hedge accounting criteria that a change in the counterparty is not in and of itself considered a termination of the derivative or critical term of the hedging relationship.
January 1, 2017
The adoption of the guidance did not have a material impact on the Company's financial statements.
ASU 2016-07 - Investments - Equity Method and Joint Ventures: Simplifying the Transition to the Equity Method of Accounting
March 2016
Simplifies the transition to equity method accounting for entities that have an investment that becomes qualified for the equity method of accounting as a result of an increase in the level of ownership interest or degree of influence.
January 1, 2017
The adoption of the guidance did not have a material impact on the Company's financial statements.
ASU 2016-09 - Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting
March 2016
The amendment includes provisions intended to simplify various aspects related to how share-based payments are accounted for and presented in the financial statements.
January 1, 2017
The Company included appropriate disclosures within the current year 10-K to adhere to this new ASU.
ASU 2017-03 - Accounting Changes and Error Corrections (Topic 250) and Investments-Equity Method and Joint Ventures (Topic 323)
January 2017
Amends the disclosure requirements associated with certain recently issued Accounting Standards and how they will have an impact on the Financial Statements of a registrant when such standards are adopted in a future period. It applies to ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606); ASU No. 2016-02, Leases (Topic 842); and ASU No. 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments and any subsequent amendments to these ASU's.
Effective Immediately
The Company included appropriate disclosure requirements within this 10-K to adhere to this new ASU.
No other new accounting pronouncement issued or effective has had or is expected to have a material impact on the Company’s consolidated financial statements. |
