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New Accounting Guidance | 3 Months Ended
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Mar. 31, 2018
New Accounting Pronouncements and Changes in Accounting Principles [Abstract] |
New Accounting Guidance | ew Accounting Guidance New Accounting Pronouncements Effective January 1, 2018: The following new accounting standards were adopted using a modified retrospective approach through a cumulative-effect adjustment to retained earnings as of January 1, 2018: New Revenue Recognition Standard In May 2014, the FASB issued new accounting guidance related to revenue from contracts with customers. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The Company adopted the new guidance effective January 1, 2018, using the modified retrospective method, which applies the new guidance beginning with the year of adoption, with the cumulative effect of initially applying the guidance recognized as an adjustment to retained earnings at January 1, 2018. The Company elected to apply the modified retrospective method to all contracts. The guidance includes requirements to estimate variable or contingent consideration to be received, which will result in revenue being recognized earlier than under legacy GAAP. In addition, the guidance requires the capitalization and amortization of certain costs which were expensed as incurred under legacy GAAP. As discussed in more detail below, the adoption of this new revenue recognition standard will shift revenue among quarters from historical patterns, but is not expected to have a significant year-over-year impact on annual revenue. Upon adoption of the new revenue standard, the Company recognized significant movement in the quarterly timing of revenue recognized in the Risk and Insurance Services segment. In particular, under the new standard the recognition of revenue for reinsurance broking was accelerated from historical patterns. Estimated revenue from these treaties is recognized largely at the policy effective date at which point control over the services provided by the Company transfers to the client and the client has accepted the services. This resulted in a significant increase in revenue in the first quarter of 2018 compared to the same period in 2017. Prior to the adoption of this standard, revenue related to most reinsurance placements was recognized on the later of billing or effective date as premiums are determined by the primary insurers and attached to the reinsurance treaties. Typically, this resulted in revenue being recognized over a 12 to 18 month period. The timing of revenue recognition for certain fee based brokerage arrangements will shift among quarters. However, since the vast majority of the Company's fee arrangements involve contracts that cover a single year of services, the Company does not expect there will be a significant change in the amount of revenue recognized in an annual period. In the Risk and Insurance Services segment, certain pre-placement costs are now deferred and amortized into earnings when revenue from the placement is recognized. These costs were previously expensed as incurred. As such, the Company expects the recognition of costs to shift among quarters. In the Consulting segment, the adoption of the new revenue standard will not have a significant impact on the timing of revenue recognition in quarterly or annual periods. In Consulting, the Company incurs implementation costs necessary to facilitate the delivery of the contracted services. The Company has concluded that certain additional implementation costs previously expensed under legacy GAAP will be deferred under the new guidance. In addition, the amortization period for these implementation costs will include the initial contract term plus expected renewals. The cumulative effect of adopting the standard, net of tax, on January 1, 2018 resulted in an increase to the opening balance of retained earnings of $364 million, with offsetting increases/decreases to other balance sheet accounts, e.g. accounts receivable, other assets and deferred income taxes. The comparative information and prior periods was not restated and will continue to be reported under the legacy accounting standards that were in effect for those periods. The impact of adoption of the new revenue standard on the Company's consolidated income statement was as follows (in millions):
|  |  | Three Months Ended March 31, 2018
|  |  | As Reported |  | Revenue Standard Impact |  | Legacy GAAP
Revenue |  |  | $ | 4,000 |  |  | $ | (161 | ) |  | $ | 3,839 |
Expense: |  |  |  |  |  |  |  |  |
Compensation and Benefits |  |  | 2,224 |  |  | (60 | ) |  | 2,164 |
Other Operating Expenses |  |  | 868 |  |  | — |  |  | 868 |
Operating Expenses |  |  | 3,092 |  |  | (60 | ) |  | 3,032 |
Operating Income |  |  | 908 |  |  | (101 | ) |  | 807 |
Other Net Benefit Credits |  |  | 66 |  |  | — |  |  | 66 |
Interest Income |  |  | 3 |  |  | — |  |  | 3 |
Interest Expense |  |  | (61 | ) |  | — |  |  | (61 | )
Income Before Income Taxes |  |  | 916 |  |  | (101 | ) |  | 815 |
Income Tax Expense |  |  | 220 |  |  | (26 | ) |  | 194 |
Net Income Before Non-Controlling Interests |  |  | 696 |  |  | (75 | ) |  | 621 |
Less: Net Income Attributable to Non-Controlling Interests |  |  | 6 |  |  | — |  |  | 6 |
Net Income Attributable to the Company |  |  | $ | 690 |  |  | $ | (75 | ) |  | $ | 615 |
The impact of adoption of the new revenue standard on the Company's consolidated balance sheet was as follows (in millions):
|  | March 31, 2018
|  | As Reported |  | Revenue Standard Impact |  | Legacy GAAP
ASSETS |  |  |  |  |  |
Current assets: |  |  |  |  |  |
Cash and cash equivalents |  | $ | 1,168 |  |  | $ | — |  |  | $ | 1,168 |
Net receivables |  | 4,562 |  |  | (242 | ) |  | 4,320 |
Other current assets |  | 540 |  |  | (294 | ) |  | 246 |
Total current assets |  | 6,270 |  |  | (536 | ) |  | 5,734 |
Goodwill and intangible assets |  | 10,450 |  |  | — |  |  | 10,450 |
Fixed assets, net |  | 713 |  |  | — |  |  | 713 |
Pension related assets |  | 1,857 |  |  | — |  |  | 1,857 |
Deferred tax assets |  | 554 |  |  | 119 |  |  | 673 |
Other assets |  | 1,535 |  |  | (231 | ) |  | 1,304 |
TOTAL ASSETS |  | $ | 21,379 |  |  | $ | (648 | ) |  | $ | 20,731 |
LIABILITIES AND EQUITY |  |  |  |  |  |
Current liabilities: |  |  |  |  |  |
Short-term debt |  | $ | 512 |  |  | $ | — |  |  | $ | 512 |
Accounts payable and accrued liabilities |  | 2,343 |  |  | (176 | ) |  | 2,167 |
Accrued compensation and employee benefits |  | 813 |  |  | — |  |  | 813 |
Accrued income taxes |  | 261 |  |  | — |  |  | 261 |
Dividends payable |  | 193 |  |  | — |  |  | 193 |
Total current liabilities |  | 4,122 |  |  | (176 | ) |  | 3,946 |
Fiduciary liabilities |  | 5,140 |  |  | — |  |  | 5,140 |
Less - cash and investments held in a fiduciary capacity |  | (5,140 | ) |  | — |  |  | (5,140 | )
|  | — |  |  | — |  |  | — |
Long-term debt |  | 5,815 |  |  | — |  |  | 5,815 |
Pension, post-retirement and post-employment benefits |  | 1,842 |  |  | — |  |  | 1,842 |
Liabilities for errors and omissions |  | 312 |  |  | — |  |  | 312 |
Other liabilities |  | 1,267 |  |  | (33 | ) |  | 1,234 |
Total equity |  | 8,021 |  |  | (439 | ) |  | 7,582 |
TOTAL LIABILITIES AND EQUITY |  | $ | 21,379 |  |  | $ | (648 | ) |  | $ | 20,731 |
The impact of adoption of the new revenue standard on the Company's consolidated statement of cash flow was as follows (in millions):
|  | Three Months Ended March 31, 2018
|  | As Reported |  | Revenue Standard Impact |  | Legacy GAAP
Operating cash flows: |  |  |  |  |  |
Net income before non-controlling interests |  | $ | 696 |  |  | $ | (75 | ) |  | $ | 621 |
Adjustments to reconcile net income to cash used for operations: |  |  |  |  |  |
Depreciation and amortization of fixed assets and capitalized software |  | 80 |  |  | — |  |  | 80 |
Amortization of intangible assets |  | 45 |  |  | — |  |  | 45 |
Adjustments and payments related to contingent consideration liability |  | (5 | ) |  | — |  |  | (5 | )
Provision for deferred income taxes loss on disposal of assets |  | 11 |  |  | — |  |  | 11 |
Gain on disposition of assets |  | (1 | ) |  | — |  |  | (1 | )
Share-based compensation expense |  | 50 |  |  | — |  |  | 50 |
Changes in assets and liabilities: |  |  |  |  |  |
Net receivables |  | (357 | ) |  | 174 |  |  | (183 | )
Other current assets |  | 2 |  |  | (24 | ) |  | (22 | )
Other assets |  | (32 | ) |  | (11 | ) |  | (43 | )
Accounts payable and accrued liabilities |  | 135 |  |  | (54 | ) |  | 81 |
Accrued compensation and employee benefits |  | (905 | ) |  | — |  |  | (905 | )
Accrued income taxes |  | 61 |  |  | — |  |  | 61 |
Contributions to pension excess of expense/credit |  | (96 | ) |  | — |  |  | (96 | )
Other liabilities |  | 17 |  |  | (10 | ) |  | 7 |
Effect of exchange rate changes |  | (65 | ) |  | — |  |  | (65 | )
Net cash used for operations |  | $ | (364 | ) |  | $ | — |  |  | $ | (364 | )
The adoption of the revenue recognition standard did not have an impact on the Company's financing or investing cash flows. Other Standards Adopted Effective January 1, 2018 using the modified retrospective approach In January 2016, the FASB issued new guidance intended to improve the recognition and measurement of financial instruments. The new guidance requires investments in equity securities (except those accounted for under the equity method of accounting, or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income; requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes; requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (i.e., securities or loans and receivables) on the balance sheet or the accompanying notes to the financial statements; eliminates the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet; and requires a reporting organization to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk (also referred to as "own credit") when the organization has elected to measure the liability at fair value in accordance with the fair value option for financial instruments. The new guidance was effective for public companies for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The Company holds certain equity investments that under legacy GAAP were previously treated as available for sale securities, whereby the mark-to-market change was recorded to other comprehensive income in its consolidated balance sheet. The Company adopted the new accounting guidance, effective January 1, 2018, recording a cumulative-effect adjustment increase to retained earnings as of the beginning of the period of adoption of $14 million, reflecting the reclassification of cumulative unrealized gains, net of tax as of December 31, 2017 from accumulated other comprehensive income to retained earnings. Therefore, prior periods have not been restated. In October 2016, the FASB also issued new guidance which requires an entity to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. The new guidance eliminates the exception for an intra-entity transfer of an asset other than inventory. The new guidance is effective for public companies for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The new guidance must be applied on a modified retrospective basis through a cumulative-effect adjustment to retained earnings as of the beginning of the period of adoption. The Company adopted the new guidance, effective January 1, 2018, recording a cumulative-effect adjustment decrease to retained earnings of approximately $14 million as of the beginning of the period of adoption. The impact on the Company's balance sheet as of January 1, 2018 related to the adoption of the accounting standards using the modified retrospective approach as discussed above is as follows:
|  |  | Adjustments |  |
| Balance at December 31, 2017 |  | Revenue Recognition |  | Financial Instruments |  | Intra-Entity Transfer |  | Balance at January 1, 2018
Balance Sheet |  |  |  |  |  |  |  |  |
Assets |  |  |  |  |  |  |  |  |
Net Receivables | $ | 4,133 |  |  | $ | 68 |  |  | $ | — |  |  | $ | — |  |  | $ | 4,201 |
Other Current Assets | 224 |  |  | 318 |  |  | — |  |  | — |  |  | 542 |
Other Assets | 1,430 |  |  | 226 |  |  | — |  |  | — |  |  | 1,656 |
Deferred Tax Assets | 669 |  |  | (103 | ) |  | — |  |  | (14 | ) |  | 552 |
Liabilities |  |  |  |  |  |  |  |  |
Accounts Payable and Accrued Liabilities | 2,083 |  |  | 122 |  |  | — |  |  | — |  |  | 2,205 |
Other Liabilities | 1,311 |  |  | 23 |  |  | — |  |  | — |  |  | 1,334 |
Equity |  |  |  |  |  |  |  |  |
Other Accumulated Comprehensive Income | — |  |  | — |  |  | (14 | ) |  | — |  |  | (14 | )
Retained Earnings | $ | 13,140 |  |  | $ | 364 |  |  | $ | 14 |  |  | $ | (14 | ) |  | $ | 13,504 |
Cumulative effect adjustment related to the adoption of the revenue recognition standard The cumulative effect adjustment recorded to net receivables is primarily related to contingent brokerage revenue and reinsurance revenue placements. Under the new guidance, the Company is required to record an estimate of variable or contingent consideration earlier than under the previous rules. Also under the new guidance, revenue related to most reinsurance placements is accelerated versus previous patterns. The cumulative effect adjustments also includes the capitalization of costs to fulfill and costs to obtain that are included in other current assets and other assets, respectively. These costs were previously expensed as incurred. The adjustment to accounts payable and accrued liabilities includes deferred revenue related to the timing of fee revenue recognition for fee based arrangements and certain post placement servicing costs, primarily related to reinsurance brokerage costs that were previously expensed as incurred. Adoption of amended accounting standard using the retrospective application approach Effective January 1, 2018, the Company adopted new guidance that changes the presentation of net periodic pension cost and net periodic postretirement cost (''net periodic benefit costs"). The new guidance requires employers to report the service cost component of net periodic benefit costs in the same line item as other compensation costs in the income statement. The other components of net periodic benefit costs are required to be presented in the income statement separately from the service cost component and outside a subtotal of income from operations. The guidance is effective for annual periods beginning after December 15, 2017, including interim periods within those annual periods. The new guidance requires retrospective application for the presentation of the service cost component and the other components of net periodic benefit costs. Accordingly, we have reclassified prior period information in the consolidated results of operations, segment data and related disclosures contained in our management's discussion and analysis and notes to the consolidated financial statements to reflect the retrospective adoption of this standard. Other accounting standards adopted effective January 1, 2018 In November 2016, the FASB issued new guidance which requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents and amounts generally described as restricted cash or restricted cash equivalents. As a result, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The Company adopted this guidance, which is required to be applied retrospectively to all periods presented, effective January 1, 2018. The adoption of this guidance did not impact the Company's consolidated balance sheets or consolidated statements of cash flows. In August 2016, the FASB issued new guidance which adds or clarifies guidance on the classification of certain cash receipts and payments in the statement of cash flows, including cash payments for debt prepayments or debt extinguishment costs, contingent consideration payments made after a business combination and distributions received from equity method investees. The Company adopted this guidance effective January 1, 2018. The adoption of this guidance did not impact the Company's consolidated statements of cash flows. In January 2017, the FASB issued guidance which clarifies the definition of a business in order to assist companies with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The Company adopted this guidance effective January 1, 2018. The adoption of this standard did not have an impact on the Company's financial position or results of operations. New Accounting Pronouncements Not Yet Adopted In January 2017, the FASB issued new guidance to simplify the test for goodwill impairment. The new guidance eliminates the second step in the current two-step goodwill impairment process, under which a goodwill impairment loss is measured by comparing the implied fair value of a reporting unit's goodwill with the carrying amount of that goodwill for that reporting unit. The new guidance requires a one-step impairment test, in which the goodwill impairment charge is based on the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. The guidance should be applied on a prospective basis with the nature of and reason for the change in accounting principle disclosed upon transition. The guidance is effective for annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted. The Company does not expect the adoption of this standard to have a material impact on its financial position or results of operations. In February 2016, the FASB issued new guidance intended to improve financial reporting for leases. Under the new guidance, a lessee will be required to recognize assets and liabilities for leases with lease terms of more than 12 months. Consistent with current GAAP, the recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee primarily will depend on its classification as a financing or operating lease. However, unlike current GAAP, which requires that only capital leases be recognized on the balance sheet, the new guidance requires that both types of leases be recognized on the balance sheet. The new guidance will require additional disclosures to help investors and other financial statement users better understand the amount, timing, and uncertainty of cash flows arising from leases. These disclosures include qualitative and quantitative requirements, and additional information about the amounts recorded in the financial statements. The accounting by organizations that own the assets ("lessor") leased by the lessee will remain largely unchanged from current GAAP. However, the guidance contains targeted improvements that are intended to align, where necessary, lessor accounting with the lessee accounting model. The new guidance on leases is effective for public companies for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early application is permitted. The Company is currently evaluating the impact the adoption of the guidance will have on its financial position and results of operations, but expects material "right of use" assets and lease liabilities to be recorded on its consolidated balance sheets.

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- Definition The entire disclosure of changes in accounting principles, including adoption of new accounting pronouncements, that describes the new methods, amount and effects on financial statement line items. + References Reference 1: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 250 -URI http://asc.fasb.org/topic&trid=2122394 + Details
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