(3) Recent Accounting Standards

Share-based compensation accounting

In March 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2016-09, Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting (“ASU 2016-09”), to simplify certain aspects of accounting for share-based payment transactions. Under ASU 2016-09, all excess tax benefits should be recognized as income tax expense or benefit in the income statement, regardless of whether the benefit reduces taxes payable in the current period. The excess tax benefits will be combined with other income tax cash flows within operating activities in the statement of cash flows. In addition, excess tax benefits or tax deficiencies will no longer be included in the calculation of assumed proceeds under the treasury stock method of computing diluted earnings per share. ASU 2016-09 also allows companies to make an accounting policy election to either estimate the number of awards expected to vest or to account for forfeitures as they occur, when accruing share-based compensation expense. Lastly, ASU 2016-09 permits employers to withhold up to the employee’s maximum statutory tax rate in applicable jurisdictions and still qualify for the exception to liability classification. Cash paid by an employer when directly withholding shares for tax-withholding purposes should be classified as a financing activity in the statement of cash flows. The Company adopted this guidance on January 1, 2017 and has:

(i)

recognized excess tax benefits as part of the “Provision for income taxes” line item in the Consolidated Statements of Operations, on a prospective basis.

(ii)

combined the impact of excess tax benefits with the “Deferred taxes” line item within operating activities in the Consolidated Statements of Cash Flows, on a prospective basis.

(iii)

excluded excess tax benefits or tax deficiencies in the calculation of the Company’s diluted earnings per share, on a prospective basis; and

(iv)

made an accounting policy election to account for forfeitures as they occur, on a modified retrospective basis, the impact of which is generally consistent with the Company’s previous method of estimating forfeitures.

No prior periods have been adjusted in connection with the Company’s adoption of ASU 2016-09. In addition, no cumulative-effect adjustments to retained earnings have been recorded as of January 1, 2017 because there were no unrecognized excess tax benefits or tax deficiencies outstanding and no expected forfeitures applied to the Company’s share-based compensation expense as of the end of the preceding year. The remaining amendments under ASU 2016-09 did not have a material impact on the Company’s consolidated financial position, results of operations, and cash flows.

Statement of cash flows

In November 2016, the FASB issued Accounting Standards Update No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash (a consensus of the FASB Emerging Issues Task Force) (“ASU 2016-18”), to address the diversity in practice that currently exists regarding the classification and presentation of changes in restricted cash on the statement of cash flows. Under ASU 2016-18, entities will be required to include restricted cash and restricted cash equivalents with total cash and cash equivalents when reconciling the beginning and end of period amounts on the statement of cash flows. Entities will also be required to disclose information about the nature of their restricted cash and restricted cash equivalents. Additionally, if cash, cash equivalents, restricted cash and restricted cash equivalents are presented in more than one line item in the statement of financial position, entities will be required to present a reconciliation, either on the face of the statement of cash flows or disclosed in the notes, of the totals in the statement of cash flows to the related line item captions in the statement of financial position. The Company adopted this guidance on January 1, 2017 and retrospectively applied the required updates to its Consolidated Statements of Cash Flows for all periods presented. The Company does not consider its restricted cash balances to be material for further disclosure or reconciliation. The adoption of this guidance did not impact the Company’s consolidated financial position, results of operations, or footnote disclosures.

Revenue from contracts with customers

In May 2014, the FASB issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU 2014-09”), which supersedes nearly all existing revenue recognition guidance. The standard’s core principle is that an entity should recognize revenue when it transfers 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 standard also requires disclosure of additional information to enable users of financial statements to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers.

The Company will adopt this guidance and its subsequent amendments effective as of January 1, 2018 and will adjust prior period consolidated financial statements to reflect full retrospective adoption, beginning with the Quarterly Report on Form 10-Q for the first quarter of 2018. The Company has substantially completed the implementation of key system changes and changes to internal controls over financial reporting to allow the Company to timely compile the information needed to account for transactions under this new guidance and to adjust its prior periods’ consolidated financial statements.

In adopting ASU 2014-09, the Company expects the following significant changes in accounting principles:

(i)

Timing of revenue recognition for term license sales. Under ASU 2014-09, the Company will recognize product license revenue from term licenses upon delivery of the software. Previously, this revenue was recognized over the term of the arrangement.

(ii)

Timing of revenue recognition for sales to channel partners. Under ASU 2014-09, the Company will recognize revenue from sales made to resellers and OEMs when control of the products transfers to the reseller or OEM, less adjustments for returns or price protection. Previously, this revenue was not recognized until the product was sold by the reseller or OEM to the end user.

(iii)

Allocating the transaction price to the performance obligations in the contract. Under ASU 2014-09, the Company will allocate the transaction price to the various performance obligations in the contract based on their relative standalone selling price (“SSP”). Except for SSP of product support, the Company’s methodologies for estimating SSP of its various performance obligations will be generally consistent with the Company’s previous methodologies used to establish VSOE of fair value on multiple element arrangements. The SSP of product support will result in a difference in the allocation of the transaction price between product support and product license performance obligations. The Company expects the impact from SSP-based allocations to be immaterial to the financial statements.

(iv)

Material rights. The Company’s contracts with customers may include options to acquire additional goods and services at a discount. Under ASU 2014-09, certain of these options may be considered material rights if sold below SSP and would be treated as separate performance obligations and included in the allocation of the transaction price. Previously, none of the Company’s options were considered material rights. The Company expects the impact from material rights to be immaterial to the financial statements.

(v)

Presentation of accounts receivable, contract assets, and contract liabilities (deferred revenue). Under ASU 2014-09, the Company’s rights to consideration are presented separately depending on whether those rights are conditional or unconditional. The Company will present its unconditional rights to consideration as “accounts receivable” in its Consolidated Balance Sheets. In contrast, separate “contract assets” will represent rights to consideration that are subject to a condition other than the passage of time, and will be comprised primarily of accrued sales- and usage-based royalty revenue. Previously, this revenue was not recognized until quarterly royalty reporting had been received from the OEM. Under ASU 2014-09, once quarterly royalty reporting has been received, the related contract assets will be transferred to accounts receivable. Current and non-current contract assets will be included under “Prepaid expenses and other current assets” and “Deposits and other assets,” respectively, on the Company’s Consolidated Balance Sheets. Further, contract assets will be netted against “contract liabilities” at the contract level. Contract liabilities will be presented as “deferred revenue” on the Company’s Consolidated Balance Sheets and will be comprised of consideration received, or accounts receivable recorded, prior to the transfer of goods or services to the customer. Under ASU 2014-09, the Company cannot net accounts receivable with deferred revenue and the Company will no longer offset its accounts receivable and deferred revenue balances for unpaid items that are included in the deferred revenue balance. Previously, this offsetting of accounts receivable and deferred revenue balances for unpaid amounts was applied in the Company’s financial statements.

(vi)

Deferral of incremental direct costs to obtaining a contract with a customer. Under ASU 2014-09, the Company will capitalize certain variable compensation (i.e., sales commissions) payable to its sales force and subsequently amortize the capitalized costs over a period of time that is consistent with the transfer of the related good or service to the customer, which the Company has determined to be three years. Capitalized costs, net of accumulated amortization, will be included in “Deposits and other assets” on the Company’s Consolidated Balance Sheets. Previously, the Company elected to expense these incremental direct costs as incurred.

The Company currently estimates the adoption of ASU 2014-09 will increase its 2016 beginning retained earnings balance by approximately $13.0 million, offset by a $13.0 million decrease in gross deferred revenues, a $5.0 million decrease in deferred tax assets, net of deferred tax liabilities, a $4.0 million increase in other non-current assets, and a $1.0 million increase in other current assets. In addition, net accounts receivable and net deferred revenues as of December 31, 2017 and 2016 will each further increase by approximately $95.9 million and $101.5 million, respectively, due to the Company no longer offsetting these balances for unpaid amounts included in the gross deferred revenue balances. For the years ended December 31, 2017 and 2016, the Company estimates $2.5 million and $3.0 million, respectively, of previously expensed variable compensation will be capitalized and amortized over a three-year period. The Company estimates that product licenses revenues will decrease by approximately $0.5 million and increase by approximately $1.5 million for the years ended December 31, 2017 and 2016, respectively. The Company also estimates its provision for income taxes will decrease by approximately $1.5 million and increase by approximately $0.5 million for the years ended December 31, 2017 and 2016, respectively.

Intra-entity asset transfers

In October 2016, the FASB issued Accounting Standards Update No. 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory (“ASU 2016-16”), to improve the accounting for income tax effects of intra-entity transfers of assets other than inventory. Under ASU 2016-16, the deferral of the income tax consequences of intra-entity transfers of assets other than inventory is eliminated. Entities will be required to recognize the income tax consequences of intra-entity transfers of assets other than inventory when the transfers occur. The standard requires a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption using a modified retrospective approach. The Company will adopt this guidance effective as of January 1, 2018. The adoption of this guidance is not expected to have a material impact on the Company’s consolidated financial position, results of operations, or cash flows.

Lease accounting

In February 2016, the FASB issued Accounting Standards Update No. 2016-02, Leases (Topic 842) (“ASU 2016-02”), which requires lease assets and lease liabilities be recognized for all leases, in addition to the disclosure of key information to enable users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from an entity’s leasing arrangements. ASU 2016-02 defines a lease as a contract, or part of a contract, that conveys both (i) the right to obtain economic benefits from and (ii) direct the use of an identified asset for a period of time in exchange for consideration. Under ASU 2016-02, leases are classified as either finance or operating leases. For finance leases, a lessee shall recognize in profit or loss the amortization of the lease asset and interest on the lease liability. For operating leases, a lessee shall recognize in profit or loss a single lease cost, calculated so that the remaining cost of the lease is allocated over the remaining lease term, generally on a straight-line basis. ASU 2016-02 requires the recognition and measurement of leases at the beginning of the earliest period presented using a modified retrospective approach and is effective for interim and annual periods beginning January 1, 2019. Early adoption is permitted. The Company is currently evaluating the impact of this guidance on its consolidated financial position, results of operations, and cash flows.