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Organization and Significant Accounting Policies | 9 Months Ended
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Sep. 30, 2022
Organization, Consolidation and Presentation of Financial Statements [Abstract] |
Organization and Significant Accounting Policies |
1. Organization and Significant Accounting Policies
Organization and Business
DexCom, Inc. is a medical device company that develops and markets continuous glucose monitoring, or CGM, systems for the management of diabetes by patients, caregivers, and clinicians around the world. Unless the context requires otherwise, the terms “we,” “us,” “our,” the “company,” or “Dexcom” refer to DexCom, Inc. and its subsidiaries.
Basis of Presentation and Principles of Consolidation
We have prepared the accompanying unaudited consolidated financial statements in accordance with U.S. generally accepted accounting principles, or GAAP, for interim financial information and with the instructions to Form 10-Q and Article 10 of Securities and Exchange Commission, or SEC, Regulation S-X. Accordingly, they do not include all of the information and disclosures required by GAAP for complete financial statements. In the opinion of management, all adjustments, which include only normal recurring adjustments considered necessary for a fair presentation, have been included. Operating results for the three and nine months ended September 30, 2022 are not necessarily indicative of the results that may be expected for the year ending December 31, 2022. We expect that revenues we generate from the sales of our products will fluctuate from quarter to quarter. We experience seasonality that is typical in our industry, with lower sales in the first quarter of each year compared to the fourth quarter of the previous year. These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and related notes thereto for the year ended December 31, 2021 included in the Annual Report on Form 10-K that we filed with the SEC on February 14, 2022. These consolidated financial statements include the accounts of DexCom, Inc. and our wholly owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. We have reclassified certain amounts previously reported in our financial statements to conform to the current presentation. Amortization expense related to intangible assets has been presented separately from selling, general and administrative expenses in our consolidated statement of operations. We determine the functional currencies of our international subsidiaries by reviewing the environment where each subsidiary primarily generates and expends cash. For international subsidiaries whose functional currencies are the local currencies, we translate the financial statements into U.S. dollars using period-end exchange rates for assets and liabilities and average exchange rates for each period for revenue, costs and expenses. We include translation-related adjustments in comprehensive income and in accumulated other comprehensive income (loss) in the equity section of our consolidated balance sheets. We record gains and losses resulting from transactions with customers and vendors that are denominated in currencies other than the functional currency and from certain intercompany transactions in interest and other income (expense), net in our consolidated statements of operations.
Stock Split
On June 10, 2022, the Company effected a four-for-one forward stock split of its common stock to shareholders of record as of May 19, 2022. The par value of the common stock remains $0.001 per share. All share and per share information has been retroactively adjusted to reflect the stock split for all periods presented.
Use of Estimates
The preparation of consolidated financial statements in conformity with GAAP requires us to make certain estimates and assumptions that affect the amounts reported in our consolidated financial statements and the disclosures made in the accompanying notes. Areas requiring significant estimates include rebates, transaction price, the collectibility of accounts receivable, excess or obsolete inventories and the valuation of inventory, accruals for litigation contingencies, and the amount of our worldwide tax provision and the realizability of deferred tax assets. Despite our intention to establish accurate estimates and use reasonable assumptions, actual results may differ from our estimates.
Accounts Receivable and Allowance for Doubtful Accounts
Accounts receivable are generally recorded at the invoiced amount, net of prompt pay discounts, for distributors and at net realizable value for direct customers, which is determined using estimates of claim denials and historical reimbursement experience without regard to aging category. Accounts receivable are not interest bearing. We evaluate the creditworthiness of significant customers based on historical trends, the financial condition of our customers, and external market factors. We generally do not require collateral from our customers. We maintain an allowance for doubtful accounts for potential credit losses. Uncollectible accounts are written off against the allowance after appropriate collection efforts have been exhausted and when it is deemed that a customer account is uncollectible. Generally, receivable balances that are more than one year past due are deemed uncollectible.
Concentration of Credit Risk
Financial instruments which potentially subject us to concentrations of credit risk consist primarily of cash, cash equivalents, short-term marketable securities, and accounts receivable. We limit our exposure to credit risk by placing our cash and investments with a few major financial institutions. We have also established guidelines regarding diversification of our investments and their maturities that are designed to maintain principal and maximize liquidity. We review these guidelines periodically and modify them to take advantage of trends in yields and interest rates and changes in our operations and financial position.
Inventory
Inventory is valued at the lower of cost or net realizable value on a part-by-part basis that approximates first in, first out. We capitalize inventory produced in preparation for commercial launches when it becomes probable that the product will receive regulatory approval and that the related costs will be recoverable through the commercialization of the product. A number of factors are considered, including the status of the regulatory application approval process, management’s judgment of probable future commercial use, and net realizable value. We record adjustments to inventory for potential excess or obsolete inventory, as well as inventory that does not pass quality control testing, in order to state inventory at net realizable value. Factors influencing these adjustments include inventories on hand and on order compared to estimated future usage and sales for existing and new products, as well as judgments regarding quality control testing data and assumptions about the likelihood of scrap and obsolescence. Once written down the adjustments are considered permanent and are not reversed until the related inventory is disposed of or sold. Our products require customized products and components that currently are available from a limited number of sources. We purchase certain components and materials from single sources due to quality considerations, costs or constraints resulting from regulatory requirements. Historically, our inventory reserves have been adequate to cover our actual losses. However, if actual product life cycles, product quality or market conditions differ from our assumptions, additional inventory adjustments that would increase cost of goods sold could be required.
Revenue Recognition
We generate our revenue from the sale of disposable sensors and our reusable transmitter and receiver, collectively referred to as Reusable Hardware. We also refer to Reusable Hardware and disposable sensors in this section as Components. We generally recognize revenue when control is transferred to our customers in an amount that reflects the net consideration to which we expect to be entitled. In determining how revenue should be recognized, a five-step process is used, which includes identifying performance obligations in the contract, determining whether the performance obligations are separate, allocating the transaction price to each separate performance obligation, estimating the amount of variable consideration to include in the transaction price and determining the timing of revenue recognition for separate performance obligations. Contracts and Performance Obligations We consider customer purchase orders, which in most cases are governed by agreements with distributors or third-party payors, to be contracts with a customer. For each contract, we consider the obligation to transfer Components to the customer, each of which are distinct, to be separate performance obligations. We also provide free-of-charge software, mobile applications and updates for our Dexcom Share® remote monitoring system. The standalone selling prices of Dexcom Share® are estimated based on an expected cost plus a margin approach. Transaction Price Transaction price for the Components reflects the net consideration to which we expect to be entitled. Transaction price is typically based on the contracted rates less an estimate of claim denials and historical reimbursement experience by payor, which include current and future expectations regarding reimbursement rates and payor mix. Variable Consideration We include an estimate of variable consideration in the calculation of the transaction price at the time of sale, when control of the Components transfers to the customer. Variable consideration includes, but is not limited to: rebates, chargebacks, consideration payable to customers such as specialty distributor and wholesaler fees, product returns provision, prompt payment discounts, and various other promotional or incentive arrangements. We classify our provisions related to variable consideration as a reduction of accounts receivable when we are not required to make a payment or as a liability when we are required to make a payment. Estimates We review the adequacy of our estimates for transaction price adjustments and variable consideration at each reporting date. If the actual amounts of consideration that we were to receive differ from our estimates, we would adjust our estimates and that would affect reported revenue in the period that such variances become known. If any of these judgments were to change, it could cause a material increase or decrease in the amount of revenue we report in a particular period. Rebates We are subject to rebates on pricing programs with managed care organizations, such as pharmacy benefit managers, governmental and third-party commercial payors, primarily in the U.S. We estimate provisions for rebates based on contractual arrangements, estimates of products sold subject to rebate, known events or trends and channel inventory data. Chargebacks We participate in chargeback programs, primarily with government entities in the U.S., under which pricing on products below negotiated list prices is provided to participating entities and equal to the difference between their acquisition cost and the lower negotiated price. We estimate provisions for chargebacks primarily based on historical experience on a product and program basis, current contract prices under the chargeback programs and channel inventory data. Consideration Payable to the Customer We pay administrative and service fees to certain of our distributors based on a fixed percentage of the product price. These fees are not in exchange for a distinct good or service and therefore are recognized as a reduction of the transaction price. We accrue for these fees based on actual net sales and contractual fee rates negotiated with the customer. Product Returns In accordance with the terms of their distribution agreements, most distributors do not have rights of return. The distributors typically have a limited time frame to notify us of any missing, damaged, defective or non-conforming products. We generally provide a “30-day money back guarantee” program whereby first-time end-user customers may return Reusable Hardware. We estimate our product returns provision principally based on historical experience by applying a historical return rate to the amounts of revenue estimated to be subject to returns. Additionally, we consider other specific factors such as estimated shelf life of inventory in the distribution channel and changes to customer terms. Prompt Payment Discounts We provide customers with prompt payment discounts which may result in adjustments to the price that is invoiced for the product transferred, in the case that payments are made within a defined period. We estimate prompt payment discount accruals based on actual net sales and contractual discount rates. Various Other Promotional or Incentive Arrangements Other promotional or incentive arrangements are periodically offered to customers, including but not limited to co-payment assistance we provide to patients with commercial insurance, promotional programs related to the launch of products or other targeted promotions. We record a provision for the incentive earned based on the number of estimated claims and our estimate of the cost per claim related to product sales that we have recognized as revenue. Revenue Recognition The timing of revenue recognition is based on the satisfaction of performance obligations. Substantially all of the performance obligations associated with our Components are satisfied at a point in time, which typically occurs at shipment of our products. Terms of direct and distributor orders are generally Freight on Board (“FOB”) shipping point for U.S. orders or Free Carrier (“FCA”) shipping point for international orders. For certain sales transactions, control transfers at delivery of the product to the customer. In cases where our free-of-charge software, mobile applications and updates are deemed to be separate performance obligations, revenue is recognized over time on a ratable basis over the estimated life of the related Reusable Hardware component. Our sales of Components include an assurance-type warranty. Contract Balances Contract balances represent amounts presented in our consolidated balance sheets when either we have transferred goods or services to the customer or the customer has paid consideration to us under the contract. These contract balances include accounts receivable and deferred revenue. Payment terms vary by contract type and type of customer and generally range from 30 to 90 days. Accounts receivable as of September 30, 2022 included unbilled accounts receivable of $8.7 million. We expect to invoice and collect all unbilled accounts receivable within twelve months. We record deferred revenue when we have entered into a contract with a customer and cash payments are received or due prior to transfer of control or satisfaction of the related performance obligation. Our performance obligations are generally satisfied within twelve months of the initial contract date. The deferred revenue balances related to performance obligations that will be satisfied after twelve months was $23.6 million as of September 30, 2022 and $16.1 million as of December 31, 2021. These balances are included in other long-term liabilities in our consolidated balance sheets. Revenue recognized in the period from performance obligations satisfied in previous periods was not material for the periods presented. Deferred Cost of Sales Deferred cost of sales are associated with transactions for which revenue recognition criteria are not met but product has shipped and released from inventory. Deferred cost of sales are included in prepaid and other current assets in our consolidated balance sheets. Incentive Compensation Costs We generally expense incentive compensation associated with our internal sales force when incurred because the amortization period for such costs, if capitalized, would have been one year or less. We record these costs in selling, general and administrative expense in our consolidated statements of operations.
Senior Convertible Notes
In August 2020, the FASB issued ASU 2020-06, which simplifies the accounting for convertible debt instruments, amends the guidance on derivative scope exceptions for contracts in an entity’s own equity, and modifies the guidance on diluted earnings per share calculations. We previously followed in Accounting Standard Codification, or ASC, 470-20, which required us to separate each of our convertible debt instruments at issuance into two units of accounting, a liability component, based on our nonconvertible debt borrowing rate at issuance, and an equity component. Under ASU 2020-06, we now account for each of our convertible debt instruments as a single unit of accounting, a liability, because we concluded that there were no material conversion features that require bifurcation as a derivative under ASC 815-15 and our convertible debt instruments were not issued at a substantial premium. Since we adopted ASU 2020-06 using the full retrospective approach, we were required to apply the guidance to all convertible debt instruments we had outstanding as of January 1, 2020. Upon adoption of ASU 2020-06 as of January 1, 2020, we recognized $67.8 million cumulative-effect adjustment to increase retained earnings for the decrease in interest expense and $242.3 million decrease in additional paid in capital for the elimination of the equity component. We have updated these financial statements to reflect the cumulative adjustment for the periods presented. We have labeled our prior period financial statements and related notes “As Adjusted” to indicate the change required under the new accounting guidance. Below is a summary of the changes in our consolidated balance sheets we originally reported as of December 31, 2020 and 2021 under the ASC 470-20 legacy guidance compared to our adjusted consolidated balance sheets under the new ASU 2020-06 guidance we adopted and reflective of our four-for-one forward stock split:
Consolidated Balance Sheet | As of December 31, 2020
(In millions) | As Previously Reported |  | ASU 2020-06 Adjustment |  | Stock Split Adjustment |  | As Adjusted
Deferred tax assets | $ | 216.4 |  |  | $ | 91.3 |  |  | $ | — |  |  | $ | 307.7 |
Long-term senior convertible notes | 1,667.2 |  |  | 365.9 |  |  | — |  |  | 2,033.1 |
Common stock | 0.1 |  |  | — |  |  | 0.3 |  |  | 0.4 |
Additional paid-in-capital | 2,125.3 |  |  | (398.5) |  |  | (0.3) |  |  | 1,726.5 |
Accumulated deficit | $ | (202.1) |  |  | $ | 123.9 |  |  | $ | — |  |  | $ | (78.2) |
Consolidated Balance Sheet | As of December 31, 2021
(In millions) | As Previously Reported |  | ASU 2020-06 Adjustment |  | Stock Split Adjustment |  | As Adjusted
Deferred tax assets | $ | 220.8 |  |  | $ | 69.7 |  |  | $ | — |  |  | $ | 290.5 |
Long-term senior convertible notes | 1,702.7 |  |  | 279.1 |  |  | — |  |  | 1,981.8 |
Common stock | 0.1 |  |  | — |  |  | 0.3 |  |  | 0.4 |
Additional paid-in-capital | 2,504.5 |  |  | (395.5) |  |  | (0.3) |  |  | 2,108.7 |
Retained earnings (Accumulated deficit) | $ | (47.4) |  |  | $ | 186.1 |  |  | $ | — |  |  | $ | 138.7 |
Below is a summary of the changes in our consolidated statements of operations for the three and nine months ended September 30, 2021 we originally reported under the ASC 470-20 legacy guidance compared to our adjusted consolidated statements of operations under the new ASU 2020-06 guidance we adopted and reflective of our four-for-one forward stock split:
Consolidated Statement of Operations | Three Months Ended September 30, 2021
(In millions, except per share data) | As Previously Reported |  | ASU 2020-06 Adjustment |  | As Adjusted
Interest expense | $ | (25.1) |  |  | $ | 20.5 |  |  | $ | (4.6) |
Income before income taxes | 90.7 |  |  | 21.3 |  |  | 112.0 |
Income tax expense | 19.8 |  |  | 4.9 |  |  | 24.7 |
Net income | 70.9 |  |  | 16.4 |  |  | 87.3 |
Basic net income per share | 0.18 |  |  | 0.05 |  |  | 0.23 |
Diluted net income per share (1) | $ | 0.18 |  |  | $ | 0.03 |  |  | $ | 0.21 |
Shares used to compute diluted net income per share | 402.0 |  |  | 28.3 |  |  | 430.3 |
Consolidated Statement of Operations | Nine Months Ended September 30, 2021
(In millions, except per share data) | As Previously Reported |  | ASU 2020-06 Adjustment |  | As Adjusted
Interest expense | $ | (75.1) |  |  | $ | 61.0 |  |  | $ | (14.1) |
Income (Loss) before taxes | 188.6 |  |  | 61.8 |  |  | 250.4 |
Income tax expense (benefit) | 14.5 |  |  | 13.7 |  |  | 28.2 |
Net income | 174.1 |  |  | 48.1 |  |  | 222.2 |
Basic net income per share | 0.45 |  |  | 0.12 |  |  | 0.57 |
Diluted net income per share (2) | $ | 0.44 |  |  | $ | 0.10 |  |  | $ | 0.54 |
Shares used to compute diluted net income per share | 399.3 |  |  | 28.6 |  |  | 427.9 |
(1) Dilutive net income used for diluted net income per share under ASU 2020-06 includes $2.8 million add back of interest expense, net of tax, attributable to assumed conversion of senior convertible notes. (2) Dilutive net income used for diluted net income per share under ASU 2020-06 includes $8.6 million add back of interest expense, net of tax, attributable to assumed conversion of senior convertible notes. Below is a summary of our consolidated balance sheet as of September 30, 2022 and consolidated statements of operations for the three and nine months ended September 30, 2022 under the ASC 470-20 legacy guidance compared to the new ASU 2020-06 guidance we adopted.
Consolidated Balance Sheet | As of September 30, 2022
(In millions) | As computed under ASC 470-20 |  | ASU 2020-06 Adjustment |  | As reported under ASU 2020-06
Prepaid and other current assets | $ | 168.6 |  |  | $ | (17.1) |  |  | $ | 151.5 |
Deferred tax assets | 271.3 |  |  | 71.0 |  |  | 342.3 |
Long-term senior convertible notes | 1,753.1 |  |  | 215.7 |  |  | 1,968.8 |
Additional paid-in-capital | 2,466.5 |  |  | (394.4) |  |  | 2,072.1 |
Retained earnings | $ | 155.5 |  |  | $ | 232.6 |  |  | $ | 388.1 |
Consolidated Statement of Operations | Three Months Ended September 30, 2022
(In millions, except per share data) | As computed under ASC 470-20 |  | ASU 2020-06 Adjustment |  | As reported under ASU 2020-06
Interest expense | $ | (25.5) |  |  | $ | 20.9 |  |  | $ | (4.6) |
Income before income taxes | 125.3 |  |  | 20.9 |  |  | 146.2 |
Income tax expense | 40.8 |  |  | 4.2 |  |  | 45.0 |
Net income | 84.5 |  |  | 16.7 |  |  | 101.2 |
Basic net income per share | 0.22 |  |  | 0.04 |  |  | 0.26 |
Diluted net income per share (1) | $ | 0.21 |  |  | $ | 0.03 |  |  | $ | 0.24 |
Shares used to compute diluted net income per share | 398.9 |  |  | 26.9 |  |  | 425.8 |
Consolidated Statement of Operations | Nine Months Ended September 30, 2022
(In millions, except per share data) | As computed under ASC 470-20 |  | ASU 2020-06 Adjustment |  | As reported under ASU 2020-06
Loss on extinguishment of debt | $ | (0.4) |  |  | $ | 0.4 |  |  | $ | — |
Interest expense | (76.0) |  |  | 62.1 |  |  | (13.9) |
Income before income taxes | 195.1 |  |  | 62.5 |  |  | 257.6 |
Income tax expense (benefit) | (7.8) |  |  | 16.0 |  |  | 8.2 |
Net income | 202.9 |  |  | 46.5 |  |  | 249.4 |
Basic net income per share (2) | 0.52 |  |  | 0.12 |  |  | 0.64 |
Diluted net income per share | $ | 0.51 |  |  | $ | 0.09 |  |  | $ | 0.60 |
Shares used to compute diluted net income per share | 401.1 |  |  | 26.9 |  |  | 428.0 |
(1) Dilutive net income used for diluted net income per share under ASU 2020-06 includes $2.8 million add back of interest expense, net of tax, attributable to assumed conversion of senior convertible notes. (2) Dilutive net income used for diluted net income per share under ASU 2020-06 includes $8.3 million add back of interest expense, net of tax, attributable to assumed conversion of senior convertible notes.
Collaboration Agreements
We may enter into agreements with collaboration partners for the development and commercialization of our products. These arrangements may include payments contingent on the occurrence of certain events such as development, regulatory or sales-based milestones. When we account for these agreements, we consider the unique nature, terms and facts and circumstances of each transaction. Below are some example activities and how we account for them: •Payments to collaboration partners through issuance of common stock as consideration in an asset acquisition are considered share-based payment to non-employees in exchange for goods within the scope of ASC Topic 718, “Compensation - Stock Compensation.” The amount and the timing of the cost recognition of such milestones in our financial statements is driven by the accounting for the specific type of equity instrument under ASC 718 that aligns with the terms of the agreement, including any performance conditions. •The value associated with in-process research and development (“IPR&D”) in an asset acquisition incurred prior to regulatory approval is expensed as it does not have an alternative future use and is recorded as research and development expense. •The value associated with IPR&D in an asset acquisition incurred at or after regulatory approval is usually capitalized as an intangible asset and amortized over the periods in which the related products are expected to contribute to future cash flows.
Net Income Per Share
Basic net income per share attributable to common stockholders is calculated by dividing the net income attributable to common stockholders by the weighted-average number of common shares outstanding during the period. Diluted net income per share is computed using the weighted average number of common shares outstanding during the period and, when dilutive, potential common share equivalents. Potentially dilutive common shares consist of shares issuable from restricted stock units, or RSUs, performance stock units, or PSUs, warrants, and our senior convertible notes. Potentially dilutive common shares issuable upon vesting of RSUs, PSUs, and exercise of warrants are determined using the average share price for each period under the treasury stock method. Potentially dilutive common shares issuable upon conversion of our senior convertible notes are determined using the if-converted method. In periods of net losses, we exclude all potentially dilutive common shares from the computation of the diluted net loss per share for those periods as the effect would be anti-dilutive. The following table sets forth the computation of basic and diluted net income per share for the periods shown.
| Three Months Ended September 30, |  | Nine Months Ended September 30,
(In millions) | 2022 |  | 2021 |  | 2022 |  | 2021
|  |  | As Adjusted |  |  |  | As Adjusted
Net income | $ | 101.2 |  |  | $ | 87.3 |  |  | $ | 249.4 |  |  | $ | 222.2 |
Add back interest expense, net of tax attributable to assumed conversion of senior convertible notes | 2.8 |  |  | 2.8 |  |  | 8.3 |  |  | 8.6 |
Net income - diluted | $ | 104.0 |  |  | $ | 90.1 |  |  | $ | 257.7 |  |  | $ | 230.8 |
Net income per common share |  |  |  |  |  |  |
Basic | $ | 0.26 |  |  | $ | 0.23 |  |  | $ | 0.64 |  |  | $ | 0.57 |
Diluted | $ | 0.24 |  |  | $ | 0.21 |  |  | $ | 0.60 |  |  | $ | 0.54 |
Basic weighted average shares outstanding | 389.8 |  |  | 387.4 |  |  | 390.4 |  |  | 386.5 |
Dilutive potential common stock outstanding: |  |  |  |  |  |  |
Restricted stock units | 0.5 |  |  | 2.0 |  |  | 0.9 |  |  | 2.1 |
Warrants | 8.6 |  |  | 12.6 |  |  | 9.8 |  |  | 10.8 |
Senior convertible notes | 26.9 |  |  | 28.3 |  |  | 26.9 |  |  | 28.5 |
Diluted weighted average shares outstanding | 425.8 |  |  | 430.3 |  |  | 428.0 |  |  | 427.9 |
Outstanding anti-dilutive securities not included in the diluted net income per share attributable to common stockholders calculations were as follows:
| Three Months Ended September 30, |  | Nine Months Ended September 30,
(In millions) | 2022 |  | 2021 |  | 2022 |  | 2021
|  |  | As Adjusted |  |  |  | As Adjusted
Restricted stock units | 1.3 |  |  | — |  |  | 0.5 |  |  | — |
Recent Accounting Guidance
Recently Adopted Accounting Pronouncements In August 2020, the FASB issued ASU No. 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40). This new guidance is intended to reduce the complexity of accounting for convertible instruments. The guidance also addresses how convertible instruments are accounted for in the diluted earnings per share calculation and requires enhanced disclosures about the terms of convertible instruments. Entities may adopt ASU 2020-06 using either a partial retrospective or fully retrospective method of transition. This ASU is effective for public business entities for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. Early adoption is permitted for fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. We adopted ASU 2020-06 in the first quarter of 2022 using the full retrospective method, reflecting the application of the new standard in each prior reporting period. Recently Issued Accounting Pronouncements Not Yet Adopted In October 2021, the FASB issued ASU No. 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers. This guidance is intended improve the accounting for acquired revenue contracts with customers in a business combination. The new guidance requires that the acquirer recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with Topic 606. ASU 2021-08 is effective for public business entities for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years, and early adoption is permitted. The amendments should be applied prospectively to business combinations occurring on or after the adoption date. Any impact this guidance will have on our consolidated financial statements is dependent on when and if we complete future business combinations. In March 2022, the FASB issued ASU No. 2022-01, Derivatives and Hedging (Topic 815): Fair Value Hedging - Portfolio Layer Method. This guidance is related to the portfolio layer method of hedge accounting. The amendments in this update clarify the accounting and promote consistency in reporting for hedges where the portfolio layer method is applied. ASU 2022-01 is effective for public business entities for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. We are currently evaluating the impact that this guidance will have on our consolidated financial statements.

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