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Accounting Principles and Practices | 9 Months Ended
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Sep. 30, 2018
Accounting Policies [Abstract] |
Accounting Principles and Practices | Accounting Principles and Practices Adoption of New Accounting Standards Presentation of Net Periodic Pension and Postretirement Benefit Costs In March 2017, the Financial Accounting Standards Board (“FASB”) issued new accounting guidance on the presentation of net periodic pension cost and net periodic postretirement benefit cost. The new guidance requires that an employer report the service cost component in the same line item or items as other compensation costs arising from services rendered by the pertinent employees during the period. It also requires the other components of net periodic pension cost and net periodic postretirement benefit cost to be presented in the income statement separately from the service cost component and outside a subtotal of income from operations, if one is presented. Additionally, only the service cost component is eligible for capitalization, when applicable. The Company has applied the new guidance retrospectively for the presentation of the service cost component and the other components of net periodic pension cost and net periodic postretirement benefit cost in the Condensed Consolidated Statement of Income, and prospectively, on and after the effective date, for the capitalization of the service cost component of net periodic pension costs and net periodic postretirement benefit cost in assets. The new guidance allows a practical expedient that permits an employer to use the amounts disclosed in its pension and other postretirement benefit plan note for the prior comparative periods as the estimation basis for applying the retrospective presentation requirements. The Company did not apply the practical expedient upon adoption of this guidance. The new guidance was effective for Aon in the first quarter of 2018. The adoption of this guidance had no impact on the net income of the Company. Upon adoption of the guidance, the presentation of the results reflect a change in Operating income (loss) offset by an equal and offsetting change in Other income (expense) for the period ended September 30, 2017 as follows:
|  | Three Months Ended September 30, 2017 |  | Nine Months Ended September 30, 2017
|  | As Reported |  | Adjustments |  | As Adjusted |  | As Reported |  | Adjustments |  | As Adjusted
Operating income (loss) (1) |  | $ | 265 |  |  | $ | (9 | ) |  | $ | 256 |  |  | $ | 490 |  |  | $ | (26 | ) |  | $ | 464 |
Other income (expense) |  | $ | (5 | ) |  | $ | 9 |  |  | $ | 4 |  |  | $ | (20 | ) |  | $ | 26 |  |  | $ | 6 |
(1) | Reclassification from Operating income is recorded in Compensation and benefits.
Income Tax Consequences of Intercompany Transactions In October 2016, the FASB issued new accounting guidance on the income tax consequences of intra-entity asset transfers other than inventory. The guidance requires that the seller and buyer recognize the consolidated current and deferred income tax consequences of a transaction in the period the transaction occurs rather than deferring to a future period and recognizing those consequences when the asset has been sold to an outside party or otherwise recovered through use (i.e. depreciated, amortized, or impaired). The Company has applied the new guidance on a modified retrospective basis with a cumulative effect adjustment to retained earnings as of the beginning of the period of adoption. The new guidance was effective for Aon in the first quarter of 2018. Upon the adoption of this guidance on January 1, 2018, the Company recognized an increase to Deferred tax assets of $23 million, an increase to Deferred tax liabilities of $12 million, and a decrease to Other non-current assets of $26 million on the Condensed Consolidated Statement of Financial Position through a cumulative adjustment of $15 million decrease to Retained earnings. For the three and nine months ended September 30, 2018, the impact of adopting this guidance on the Condensed Consolidated Statement of Income was insignificant. Statement of Cash Flows In August 2016, the FASB issued new accounting guidance on the classification of certain cash receipts and cash payments. Under the new guidance, an entity no longer has discretion to choose the classification for a number of transactions, including contingent consideration payments made after a business combination, proceeds from the settlement of insurance claims, proceeds from the settlement of corporate-owned life insurance policies, and distributions received from equity method investees. The new standard was effective for the Company in the first quarter of 2018. The adoption of this guidance had no impact on the Company’s Condensed Consolidated Statements of Cash Flows. Financial Assets and Liabilities In January 2016, the FASB issued new accounting guidance on recognition and measurement of financial assets and financial liabilities. The amendments in the new guidance make targeted improvements, which include the requirement to measure equity investments with readily determinable fair values at fair value through net income, simplification of the impairment assessment for equity investments without readily determinable fair values, adjustments to existing and additional disclosure requirements, and additional tax considerations. The Company applied the amendments by means of a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption, with the exception of the amendments related to equity securities without readily determinable fair values, including disclosure requirements, which were applied prospectively. Upon the adoption of this guidance on January 1, 2018, the Company recognized an increase to Accumulated other comprehensive loss of $1 million on the Condensed Consolidated Statement of Financial Position through a cumulative adjustment of $1 million increase to Retained earnings. For the three and nine months ended September 30, 2018, the impact of adopting this guidance on the Condensed Consolidated Statement of Income was insignificant. Revenue Recognition In May 2014, the FASB issued a new accounting standard on revenue from contracts with customers (the “Standard” or “ASC 606”), which supersedes nearly all existing revenue recognition guidance under U.S. GAAP (“ASC 605”). The core principal of the Standard 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 additional disclosure about the nature, amount, timing, and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments, changes in judgments, and assets recognized from costs incurred to obtain or fulfill a contract. Two methods of transition were permitted upon adoption: full retrospective and modified retrospective. The Company elected to apply the modified retrospective adoption approach to all contracts. Under this approach, prior periods were not restated. Rather, revenues and other disclosures for prior periods were provided in the notes to the financial statements as previously reported under ASC 605, and the cumulative effect of initially applying the guidance was recognized as an adjustment to Retained earnings. The following summarizes the significant changes to the Company as a result of the adoption of ASC 606 on January 1, 2018.
• | The Company previously recognized revenue either at a point in time or over a period of time based on the transfer of value to customers or as the remuneration became determinable. Under ASC 606, the revenue related to certain brokerage services recognized over a period of time is recognized on the effective date of the associated policies when control of the policy transfers to the customer. As a result, revenue from these arrangements are typically recognized in earlier periods under ASC 606 in comparison to ASC 605, changing the timing and amount of revenue recognized for annual and interim periods. This change resulted in a significant shift in timing of interim revenue for the Reinsurance Solutions revenue line and, to a lesser extent, certain other brokerage services.
• | The Standard provides guidance on accounting for certain revenue-related costs including when to capitalize costs associated with obtaining and fulfilling a contract. The majority of these costs were previously expensed as incurred under ASC 605. Assets recognized for the costs to obtain a contract, which includes certain sales commissions, are amortized on a systematic basis that is consistent with the transfer of the services to which the asset relates, considering anticipated renewals when applicable. For situations where the renewal period is one year or less and renewal costs are commensurate with the initial contract, the Company applied a practical expedient and recognizes the costs of obtaining a contract as an expense when incurred. Assets recognized as costs to fulfill a contract, which includes internal costs related to pre-placement broking activities, as well as other costs, are amortized on a systematic basis that is consistent with the transfer of the services to which the asset relates, which is generally less than one year.
As a result of applying the modified retrospective method to adopt ASC 606, the following adjustments were made to the Condensed Consolidated Statement of Financial Position as of January 1, 2018:
|  | December 31, 2017 |  |  |  | January 1, 2018
(millions) |  | As Reported |  | Adjustments |  | As Adjusted
Assets |  |  |  |  |  |  |  |
Receivables, net |  | $ | 2,478 |  |  | $ | 252 |  |  | $ | 2,730 |
Other current assets |  | $ | 289 |  |  | $ | 298 |  |  | $ | 587 |
Deferred tax assets |  | $ | 389 |  |  | $ | (128 | ) |  | $ | 261 |
Other non-current assets |  | $ | 307 |  |  | $ | 145 |  |  | $ | 452 |
Liabilities |  |  |  |  |  |  |  |
Accounts payable and accrued liabilities |  | $ | 1,961 |  |  | $ | 8 |  |  | $ | 1,969 |
Other current liabilities |  | $ | 870 |  |  | $ | 13 |  |  | $ | 883 |
Deferred tax liabilities |  | $ | 127 |  |  | $ | 42 |  |  | $ | 169 |
Other non-current liabilities |  | $ | 1,102 |  |  | $ | (3 | ) |  | $ | 1,099 |
Equity |  |  |  |  |  |  |  |
Total equity |  | $ | 4,648 |  |  | $ | 507 |  |  | $ | 5,155 |
The following tables summarize the impacts of adopting ASC 606 on the Company’s Condensed Consolidated Statement of Income, Financial Position, and Cash Flows as of and for the three and nine months ended September 30, 2018. Condensed Consolidated Statement of Income
|  | Three months ended September 30, 2018 |  | Nine Months Ended September 30, 2018
(millions) |  | As Reported |  | Adjustments |  | Balances Without Adoption of ASC 606 |  | As Reported |  | Adjustments |  | Balances Without Adoption of ASC 606
Revenue |  |  |  |  |  |  |  |  |  |  |  |  |  |
Total revenue |  | $ | 2,349 |  |  | $ | 142 |  |  | $ | 2,491 |  |  | $ | 8,000 |  |  | $ | (268 | ) |  | $ | 7,732 |
Expenses |  |  |  |  |  |  |  |  |  |  |  |  |  |
Compensation and benefits |  | $ | 1,392 |  |  | $ | 36 |  |  | $ | 1,428 |  |  | $ | 4,502 |  |  | $ | (42 | ) |  | $ | 4,460 |
Other general expenses |  | $ | 336 |  |  | $ | 1 |  |  | $ | 337 |  |  | $ | 1,189 |  |  | $ | 3 |  |  | $ | 1,192 |
Income taxes |  | $ | 39 |  |  | $ | 21 |  |  | $ | 60 |  |  | $ | 9 |  |  | $ | (54 | ) |  | $ | (45 | )
Adoption of ASC 606 had an unfavorable impact of $84 million on net income from continuing operations, or $0.34 per share, for the three months ended September 30, 2018, and a favorable impact of $175 million on net income from continuing operations, or $0.71 per share, for the nine months ended September 30, 2018. Condensed Consolidated Statement of Financial Position
|  | As of September 30, 2018
(millions) |  | As Reported |  | Adjustments |  | Balances Without Adoption of ASC 606
Assets |  |  |  |  |  |  |  |
Receivables, net |  | $ | 2,656 |  |  | $ | (494 | ) |  | $ | 2,162 |
Other current assets |  | $ | 727 |  |  | $ | (227 | ) |  | $ | 500 |
Deferred tax assets |  | $ | 476 |  |  | $ | 128 |  |  | $ | 604 |
Other non-current assets |  | $ | 434 |  |  | $ | (150 | ) |  | $ | 284 |
Liabilities |  |  |  |  |  |  |  |
Other current liabilities |  | $ | 988 |  |  | $ | (13 | ) |  | $ | 975 |
Deferred tax liabilities |  | $ | 273 |  |  | $ | (59 | ) |  | $ | 214 |
Other non-current liabilities |  | $ | 1,090 |  |  | $ | 2 |  |  | $ | 1,092 |
Equity |  |  |  |  |  |  |  |
Total equity |  | $ | 4,328 |  |  | $ | (673 | ) |  | $ | 3,655 |
Condensed Consolidated Statement of Cash Flows
|  | Nine months ended September 30, 2018
(millions) |  | As Reported |  | Adjustments |  | Balances Without Adoption of ASC 606
Cash flows from operating activities |  |  |  |  |  |  |  |
Net income |  | $ | 821 |  |  | $ | (175 | ) |  | $ | 646 |
Deferred income taxes |  | $ | (128 | ) |  | $ | (16 | ) |  | $ | (144 | )
Receivables, net |  | $ | (11 | ) |  | $ | 244 |  |  | $ | 233 |
Accounts payable and accrued liabilities |  | $ | (331 | ) |  | $ | 8 |  |  | $ | (323 | )
Current income taxes |  | $ | (137 | ) |  | $ | (37 | ) |  | $ | (174 | )
Other assets and liabilities |  | $ | 139 |  |  | $ | (24 | ) |  | $ | 115 |
The adoption of ASC 606 had no impact on total Cash Provided by Operating Activities. Refer to Note 3 “Revenue from Contracts with Customers” to the Financial Statements for further information. Accounting Standards Issued But Not Yet Adopted Changes to the Disclosure Requirements for Defined Benefit Plans In August 2018, the FASB issued new accounting guidance related to the disclosure requirements for employers that sponsor defined benefit pension and other postretirement benefit plans. The guidance requires sponsors of these plans to provide additional disclosures, including weighted-average interest rates used in the entity’s cash balance pension plans and a narrative description of reasons for any significant gains or losses impacting the benefit obligation for the period, and eliminates certain previous disclosure requirements. The guidance is effective for Aon in the first quarter of 2021 with early adoption permitted and will be applied retrospectively. The Company is currently evaluating the impact that the guidance will have on the Financial Statements and the period of adoption. Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income In February 2018, the FASB issued new accounting guidance related to reclassification of certain tax effects from accumulated other comprehensive income. The guidance allows a reclassification from accumulated comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act (the “Tax Reform Act”). In addition, the entity is required to provide certain disclosures regarding stranded tax effects. The guidance is effective for Aon in the first quarter of 2019 and early adoption is permitted, including adoption in any interim period. The guidance should be applied either in the period of adoption or retrospectively to each period (or periods) in which the effect of the change in the U.S. federal corporate income tax rate in the Tax Reform Act is recognized. The Company does not anticipate electing to reclassify stranded tax effects in accumulated other comprehensive income to retained earnings and expects to adopt the disclosure guidance in the first quarter of 2019. Refer to Note 11 “Income Taxes” for further discussion of the Tax Reform Act. Targeted Improvements to Accounting for Hedging Activities In August 2017, the FASB issued new accounting guidance on targeted improvements to accounting for hedging activities. The new guidance amends its hedge accounting model to enable entities to better portray their risk management activities in the Financial Statements. The guidance eliminates the requirement to separately measure and report hedge ineffectiveness and requires the effect of a hedging instrument to be presented in the same income statement line as the hedged item. An entity will apply the new guidance on a modified retrospective basis with a cumulative effect adjustment to accumulated other comprehensive income with a corresponding adjustment to retained earnings as of the beginning of the period of adoption. Changes to income statement presentation and financial statement disclosures will be applied prospectively. The new guidance is effective for Aon in the first quarter of 2019 and early adoption is permitted. The Company is currently evaluating the impact that the guidance will have on the Financial Statements and the period of adoption. Simplifying the Test for Goodwill Impairment In January 2017, the FASB issued new accounting guidance on simplifying the test for goodwill impairment. Currently the standard requires an entity to perform a two-step test to determine the amount, if any, of goodwill impairment. In Step 1, an entity compares the fair value of a reporting unit with its carrying amount, including goodwill. If the carrying amount of the reporting unit exceeds its fair value, the entity performs Step 2 and compares the implied fair value of goodwill with the carrying amount of that goodwill for that reporting unit. An impairment charge equal to the amount by which the carrying amount of goodwill for the reporting unit exceeds the implied fair value of that goodwill is recorded, limited to the amount of goodwill allocated to that reporting unit. The new guidance removes Step 2. An entity will apply a one-step quantitative test and record the amount of goodwill impairment as the excess of a reporting unit’s carrying amount over its fair value, not to exceed the total amount of goodwill allocated to the reporting unit. The new guidance does not amend the optional qualitative assessment of goodwill impairment. An entity will apply the new guidance on a prospective basis. The new guidance is effective for Aon in the first quarter of 2020 and early adoption is permitted. The Company is currently evaluating the impact that the guidance will have on the Financial Statements and the period of adoption. Credit Losses In June 2016, the FASB issued new accounting guidance on the measurement of credit losses on financial instruments. The new guidance replaces the current incurred loss impairment methodology with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. An entity will apply the new guidance through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective. The guidance is effective for Aon in the first quarter of 2020 and early adoption is permitted beginning in the first quarter of 2019. Aon is currently evaluating the impact that the guidance will have on its Financial Statements, as well as the period of adoption. Leases In February 2016, the FASB issued a new accounting standard on leases, which requires lessees to recognize assets and liabilities for most leases. Under the new standard, a lessee should recognize in the Condensed Consolidated Statement of Financial Position a liability to make future lease payments and a right-of-use asset representing its right to use the underlying asset for the lease term. The recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee have not significantly changed from current U.S. GAAP standards. The new standard will be effective for the Company in the first quarter of 2019, with early adoption permitted and must be applied using a modified retrospective transition approach. In July 2018, the FASB amended the updated guidance on leases that was issued in February 2016 and provided an additional transition method with which to adopt the updated guidance. Under the additional transition method, entities may elect to recognize a cumulative-effect adjustment to the opening balance of retained earnings in the year of adoption. Under this transition method, an entity's reporting for the comparative periods prior to adoption presented in the financial statements would continue to be in accordance with current lease guidance. The Company expects to adopt the new standard as of January 1, 2019 using the cumulative-effect adjustment transition method approved by the FASB. Additionally, the Company will provide expanded lease disclosures required under the new standard in the first quarter of 2019. The modified retrospective approach includes several optional practical expedients that entities may elect to apply upon transition. These practical expedients relate to the identification and classification of leases that commenced before the effective date, initial direct costs for leases that commenced before the effective date, and the ability to use hindsight in evaluating lessee options to extend or terminate a lease or to purchase the underlying asset. The Company has determined it will not elect the practical expedient related to hindsight and is currently evaluating all other practical expedients and accounting policy elections that will be applied. The Company is on schedule to implement the standard as of January 1, 2019 and has executed a comprehensive approach to identify arrangements that may contain a lease, has performed completeness assessments over the identified lease population and has implemented system solutions and processes to appropriately account for the lease right-of-use assets and lease liabilities upon transition and on an ongoing basis. Further, control activities related to the adoption of this standard have been designed and begun to be implemented. Aon expects to recognize significant lease liabilities and corresponding right of use assets on its Condensed Consolidated Statements of Financial Position related to its portfolio of operating leases, but is unable to provide quantitative information at this time. The Company does not anticipate that the new standard will have a significant impact on the Condensed Consolidated Statements of Income or the Condensed Consolidated Statements of Cash Flows.

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