REVENUES

Adoption of Topic 606, Revenue from Contracts with Customers

In May 2014, the FASB issued Topic 606 which provides a single accounting model for revenue from contracts with customers and supersedes the previous revenue recognition guidance, including certain industry-specific and transaction-specific guidance. The core principle of Topic 606 is that revenue should be recognized 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 and services.

The Company adopted Topic 606 on June 1, 2018 and elected to apply Topic 606 using the modified retrospective method. The Company determined that the adoption of Topic 606 had the following impact: (i) a deferral of certain revenue associated with the Company's book fairs incentive program (reflected in Deferred revenue), (ii) recognition of a refund liability (recorded as an increase to Other accrued expenses) and a return asset (recorded as an increase to Prepaid expenses and other current assets) for the right to recover products from customers upon settling the refund liability based on expected returns and (iii) recognition of previously capitalized direct response advertising costs as incurred, primarily related to the magazines business.

Transition

The Company applied Topic 606 to all contracts as of the date of initial adoption, June 1, 2018. The cumulative effect of adopting Topic 606 was a $47.0 decrease to the opening balance of Retained earnings as of June 1, 2018.

The cumulative effect of the changes made to the Company’s Consolidated Balance Sheet at June 1, 2018 are as follows:



	As reported - May 31, 2018		Adjustments due to adoption				June 1, 2018
Accounts receivable, net	$	204.9	$	31.1		⁽¹⁾	$	236.0
Inventories, net	294.9		(1.9		)	⁽²⁾	293.0
Prepaid expenses and other current assets	66.6		(4.3		)	⁽²⁾⁽³⁾	62.3
Noncurrent deferred income taxes	25.2		16.0			⁽⁴⁾	41.2
Deferred revenue	24.7		86.8			⁽⁵⁾	111.5
Other accrued expenses	177.9		1.1			⁽⁶⁾	179.0
Retained earnings	1,065.2		(47.0		)		1,018.2

(1) - Primarily represents the reclassification of the Company’s accounting for estimated returns from a reduction to Accounts receivable, net, to a current liability within Other accrued expenses.

(2) - Represents the reclassification of a return asset from Inventory to Prepaid expenses and other current assets.

(3) - Primarily represents the adjustment for previously capitalized direct response advertising costs.

(4) - Represents the income tax impact of Topic 606 adjustments.

(5) - Represents the deferred revenue related to outstanding book fairs incentive credits as of June 1, 2018.

(6) - Represents a reduction to Other accrued expenses of $27.2 for outstanding book fair incentive credits as of June 1, 2018. This decrease was offset by a $28.3 increase for estimated returns recorded to Other accrued expenses.

Application of Topic 606 to the Current Fiscal Year

The comparative prior fiscal period information continues to be reported under the accounting standards in effect during those fiscal periods. The following table illustrates the amounts by which each income statement line item was affected by the adoption of Topic 606:



	May 31, 2019
	As reported			Adjustments			Without adoption of Topic 606
Revenues	$	1,653.9		$	12.8	⁽¹⁾	$	1,666.7
Cost of goods sold	779.9			4.0		⁽¹⁾	783.9
Selling, general and administrative expenses	781.4			1.1		⁽²⁾	782.5
Depreciation and amortization	56.1			—			56.1
Severance	10.6			—			10.6
Asset Impairments	0.9			—			0.9
Operating income (loss)	25.0			7.7			32.7
Interest (income) expense, net	(3.4		)	—			(3.4		)
Other components of net periodic benefit (cost)	(1.4		)	—			(1.4		)
Gain (Loss) on investments and other	(1.0		)	—			(1.0		)
Provision (benefit) for income taxes	10.4			2.1		⁽³⁾	12.5
Net income (loss)	15.6			5.6			21.2
Basic earnings (loss) per share:	$	0.44		$	0.16		$	0.60
Diluted earnings (loss) per share:	$	0.43		$	0.16		$	0.59

(1) - Represents an additional deferral of revenue and reduction of cost of goods sold related to the issuance of book fairs incentive

credits, partially offset by revenue recognized on incentive credits redeemed during the period.

(2) - Represents direct response advertising costs being expensed as incurred.

(3) - Represents the income tax impact of Topic 606 adjustments.

Estimated Returns

As of May 31, 2019, a liability for expected returns of $34.5 was recorded within Other accrued expenses on the Company's Consolidated Balance Sheet. In addition, as of May 31, 2019, a return asset of $1.6 was recorded within Prepaid expenses and other current assets for the recoverable cost of product estimated to be returned by customers.

Deferred Revenue

The Company's contract liabilities consist of advance billings and payments received from customers in excess of revenue recognized and revenue allocated to outstanding book fairs incentive credits. These liabilities are recorded within Deferred revenue on the Company's Consolidated Balance Sheets and are classified as short term, as substantially all of the associated performance obligations are expected to be satisfied, and related revenue recognized, within one year. The amount of revenue recognized during the year ended May 31, 2019 included within the opening Deferred revenue balance was $107.2.

Disaggregated Revenue Data

The following table presents the Company’s revenues disaggregated by region and channel during the year ended May 31:



	2019		2018
Book Clubs	$	212.4	$	224.3
Book Fairs	499.6		513.6
Trade	278.3		232.3
Total Children's Book Publishing & Distribution	990.3		970.2

Education	297.4		288.6

Major Markets⁽¹⁾	254.9		258.3
Other Markets⁽²⁾	111.3		111.3
Total International	366.2		369.6
Total Revenues	$	1,653.9	$	1,628.4

(1) - Includes Canada, UK, Australia and New Zealand.

(2) - Primarily includes markets in Asia.