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RECENT ACCOUNTING PRONOUNCEMENTS | 9 Months Ended
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Sep. 30, 2018
Accounting Changes and Error Corrections [Abstract] |
RECENT ACCOUNTING PRONOUNCEMENTS | RECENT ACCOUNTING PRONOUNCEMENTS The Company considers the applicability and impact of all accounting standard updates (ASUs). ASUs not listed below were assessed and determined to be either not applicable or are expected to have minimal impact on our consolidated financial position or results of operations. Accounting Pronouncements Recently Adopted In May 2014, the FASB issued ASU 2014-09 amending the existing accounting standards for revenue recognition. The new standard was effective for ITT as of January 1, 2018. Most revenue streams are recorded consistently under both the new standard and the previous standard. However, the timing of revenue recognition of certain design and build contracts in our Industrial Process segment, recognized using the percentage of completion method under the previous standard, is now dependent on certain terms within the contract and therefore will vary based on the new guidance. ITT adopted this guidance using a modified retrospective approach. As of the date of adoption, we have recognized approximately $49 of revenue and $5 of operating income on open contracts in our Industrial Process segment using the percentage of completion method that under the new guidance are recognized at a point in time, resulting in a cumulative adjustment to the opening balance in retained earnings of $4, net of tax. The comparative information has not been restated and continues to be reported under the accounting guidance in effect in those periods. Additionally, the new guidance resulted in a change in balance sheet presentation. Certain progress payments, previously presented as a reduction of inventory, are now presented within accrued liabilities. Unbilled receivables, previously presented within receivables, net, are now presented within other current or non-current assets. The cumulative effect of the changes made to our consolidated January 1, 2018 balance sheet related to the adoption of ASU 2014-09 is as follows:
| Balance as of December 31, 2017 | Cumulative Effect of Adjustments | Balance as of January 1, 2018
Assets: |  |  |  |  |  |  |  |  |
Receivables, net |  | $ | 629.6 |  |  |  | $ | (71.9 | ) |  |  | $ | 557.7 |  |
Inventories, net |  | 311.9 |  |  |  | 66.3 |  |  |  | 378.2 |  |
Other current assets |  | 147.4 |  |  |  | 43.2 |  |  |  | 190.6 |  |
Deferred income taxes |  | 149.9 |  |  |  | 1.0 |  |  |  | 150.9 |  |
Liabilities: |  |  |  |  |  |  |  |  |
Accrued liabilities |  | 384.4 |  |  |  | 43.7 |  |  |  | 428.1 |  |
Other non-current liabilities |  | 175.6 |  |  |  | (1.0 | ) |  |  | 174.6 |  |
Equity: |  |  |  |  |  |  |  |  |
Retained earnings |  | 1,856.1 |  |  |  | (4.1 | ) |  |  | 1,852.0 |  |
The impacts to our Consolidated Statements of Operations for the three and nine months ended September 30, 2018, and our Consolidated Balance Sheet as of September 30, 2018 had we not adopted ASU 2014-09 are as follows:
| Three Months |  | Nine Months
As of or for the Periods Ended September 30, 2018 | As Reported | Amounts under previous standard | Effect of Change |  | As Reported | Amounts under previous standard | Effect of Change
Statement of Operations |  |  |  |  |  |  |  |  |  |  |
Revenue | $ | 680.6 |  |  | $ | 683.9 |  |  | $ | 3.3 |  |  | $ | 2,066.7 |  |  | $ | 2,078.2 |  |  | $ | 11.5 |
Costs of revenue | 454.1 |  |  | 456.4 |  |  | 2.3 |  |  | 1,390.0 |  |  | 1,399.6 |  |  | 9.6 |
Income tax expense | 25.9 |  |  | 25.9 |  |  | — |  |  | 42.4 |  |  | 42.6 |  |  | 0.2 |
Net income | 111.1 |  |  | 112.1 |  |  | 1.0 |  |  | 282.3 |  |  | 284.0 |  |  | 1.7 |
Balance Sheets |  |  |  |  |  |  |  |  |  |  |
Assets: |  |  |  |  |  |  |  |  |  |  |
Receivables, net |  |  |  |  |  |  |  | 562.9 |  |  | 613.5 |  |  | 50.6 |
Inventories, net |  |  |  |  |  |  |  | 391.4 |  |  | 320.2 |  |  | (71.2 | )
Other current assets |  |  |  |  |  |  |  | 151.8 |  |  | 130.5 |  |  | (21.3 | )
Deferred income taxes |  |  |  |  |  |  |  | 163.6 |  |  | 162.4 |  |  | (1.2 | )
Liabilities: |  |  |  |  |  |  |  |  |  |  |
Accrued liabilities |  |  |  |  |  |  |  | 416.9 |  |  | 367.0 |  |  | (49.9 | )
Other non-current liabilities |  |  |  |  |  |  |  | 165.5 |  |  | 166.5 |  |  | 1.0 |
Equity: |  |  |  |  |  |  |  |  |  |  |
Retained earnings |  |  |  |  |  |  |  | 2,065.7 |  |  | 2,071.5 |  |  | 5.8 |
In March 2017, the FASB issued ASU 2017-07 which amends the Statement of Operations presentation for the components of net periodic benefit cost for entities that sponsor defined benefit pension and other postretirement plans. Under the ASU, entities are required to disaggregate the service cost component and present it with other current compensation costs for the related employees. All other components of net periodic benefit cost are no longer classified as an operating expense. In addition, only the service cost component will be eligible for capitalization on the balance sheet. The ASU requires a retrospective transition method to adopt the requirement to present service costs separately from the other components of net periodic benefit cost in the statements of operations, and a prospective transition method to adopt the requirement that prohibits capitalization of all components of net periodic benefit cost on the balance sheet except service costs. ITT adopted the ASU beginning in the first quarter of 2018. Service costs eligible for capitalization on the balance sheet in 2018 are considered immaterial. As a result of the adoption, our Consolidated Statement of Operations for the three and nine months ended September 30, 2017 was restated as follows:
For the Three Months Ended September 30, 2017 | Previously Reported | Effect of Change | Restated
Costs of revenue |  | $ | 441.9 |  |  |  | $ | (0.7 | ) |  |  | $ | 441.2 |  |
General and administrative expenses(a) |  | 74.6 |  |  |  | (4.5 | ) |  |  | 70.1 |  |
Research and development expenses |  | 23.1 |  |  |  | (0.1 | ) |  |  | 23.0 |  |
Operating income |  | 127.8 |  |  |  | 5.3 |  |  |  | 133.1 |  |
Interest and non-operating expenses, net |  | 0.2 |  |  |  | 5.3 |  |  |  | 5.5 |  |
For the Nine Months Ended September 30, 2017 | Previously Reported | Effect of Change | Restated
Costs of revenue |  | $ | 1,291.9 |  |  |  | $ | (2.1 | ) |  |  | $ | 1,289.8 |  |
General and administrative expenses(a) |  | 206.1 |  |  |  | (5.7 | ) |  |  | 200.4 |  |
Sales and marketing expenses |  | 128.3 |  |  |  | (0.1 | ) |  |  | 128.2 |  |
Research and development expenses |  | 68.2 |  |  |  | (0.2 | ) |  |  | 68.0 |  |
Operating income |  | 241.1 |  |  |  | 8.1 |  |  |  | 249.2 |  |
Interest and non-operating expenses, net |  | 0.1 |  |  |  | 8.1 |  |  |  | 8.2 |  |
(a) | Previously reported General and administrative expenses excludes $0.9 in both the three and nine months ended September 30, 2017 related to gains on the sale of long-lived assets which has been reclassed to conform with current year presentation.
In November 2016, the FASB issued ASU 2016-18 which requires restricted cash to be included with cash and cash equivalents when reconciling the beginning and ending amounts on the Statement of Cash Flows. In addition, when cash and restricted cash are presented on separate lines on the Balance Sheet, an entity is required to reconcile the total cash, cash equivalents and restricted cash in the Statement of Cash Flows to the related line items in the Balance Sheet. The ASU requires a retrospective transition method and ITT adopted the ASU beginning in the first quarter of 2018. In March 2016, the FASB issued ASU 2016-09 to simplify several aspects of the accounting standard for employee share-based payment transactions, including the classification of excess tax benefits and deficiencies and the accounting for employee forfeitures. ITT elected to adopt this guidance as of January 1, 2017 resulting in a cumulative-effect adjustment of $1.0 to increase retained earnings. The increase to retained earnings was driven by previously unrecognized tax benefits due to net operating loss carryforwards of $2.1, offset by a reduction in retained earnings of $1.1, net of tax, due to a change in our accounting policy for the forfeiture of share-based compensation arrangements. For further information on our adoption of the new standard, refer to our 2017 Annual Report. Accounting Pronouncements Not Yet Adopted In February 2016, the FASB issued ASU 2016-02 impacting the accounting for leases intending to increase transparency and comparability of organizations by requiring balance sheet presentation of leased assets and increased financial statement disclosure of leasing arrangements. The revised standard will require entities to recognize a liability for their lease obligations and a corresponding asset representing the right to use the underlying asset over the lease term. Lease obligations are to be measured at the present value of lease payments and accounted for using the effective interest method. The accounting for the leased asset will differ slightly depending on whether the agreement is deemed to be a financing or operating lease. For financing leases, the leased asset is depreciated on a straight-line basis and recorded separately from the interest expense in the statements of operations, resulting in higher expense in the earlier part of the lease term. For operating leases, the depreciation and interest expense components are combined, recognized evenly over the term of the lease, and presented as a reduction to operating income. The ASU requires that assets and liabilities be presented or disclosed separately and the liabilities must be classified appropriately as current and noncurrent. The ASU further requires additional disclosure of certain qualitative and quantitative information related to lease agreements. The ASU is effective for the Company beginning in the first quarter 2019, at which time we expect to adopt the new standard under the modified retrospective approach. We are currently assessing our existing lease agreements and related financial disclosures to evaluate the impact of these amendments on our financial statements.

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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://fasb.org/us-gaap/role/ref/legacyRef -Publisher FASB -Name Accounting Standards Codification -Topic 250 -URI http://asc.fasb.org/topic&trid=2122394 + Details
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