IPO Statistics & Readiness Discussion. ASC 606 (IFRS 15) Adoption Trends. SEC Comment Letters, SAB 74 Disclosures, Early Adopters.

Transcription

1 ASC 606 (IFRS 15) Adoption Trends IPO Statistics & SEC Comment Letters, SAB 74 Disclosures, Early Adopters Readiness Discussion January 2018

2 1 Executive Summary

3 SEC Comment Letters 2 Connor Group has reviewed SEC comment letters issued to date as of December 29, 2017 regarding the adoption or implementation of ASC 606 Revenue from Contracts with Customers (or its IFRS equivalent, IFRS 15). This population of relevant SEC comment letters was determined and the filings were retrieved via searches within CompanyIQ ¹ based on the following criteria: SEC Comment letters issued and closed as of December 29, Please note that SEC only publishes comment letters that have been fully addressed and closed. Comment letter language includes Topic 606, ASC 606 or ASU A total of 31 companies have been issued comment letters, 4 of which are early adopters of the new revenue standard. Those comment letters contain 42 comments pertaining to either the adoption or implementation of the standard. A summary of the findings is presented below: a) Over half of the comments request companies to expand their disclosures related to the evaluation and implementation status. b) For companies that are yet to adopt the standard, no comments were noted concerning specific technical issues in SAB 74 disclosures. c) On the other hand, in letters to early adopters, comments consist of both inquiries about rationale in reaching certain technical conclusions and requests to expand disclosure for specific technical areas. Those account for 35% of the total comments reviewed. Notable ones include: Disclose why cost-to-cost measure is a faithful depiction of transfer of control Disclose significant payment terms and how the timing of satisfaction of performance obligations relates to the timing of payment and the effect on the contract asset and liability balances Whether a significant financing component exists in certain long-term arrangements Rationale for concluding point-in-time recognition for customized construction contracts ¹ CompanyIQ is a product of ( a provider of SEC compliance and public company intelligence products. CompanyIQ identifies, extracts, and collates information from relevant public sources to create an 360 company profile and access SEC disclosures and SEC comments linked with responses.

4 SAB 74 Disclosures 3 This disclosure study is intended to provide an overview of current disclosures made by large US-listed companies regarding the upcoming or recent adoption of ASC 606 Revenue from Contracts with Customers (or its IFRS equivalent, IFRS 15). This is our fifth disclosure study on the topic. The last study was completed in August This study was conducted in December 2017 based on disclosures in SEC filings of 324 companies (304 companies filing using US GAAP, and 20 using IFRS). This population was determined and the filings were retrieved via searches within CompanyIQ based on the following criteria: Companies with market capitalization over $10 billion at the later of (a) companies most recent fiscal year end or (b) June 30, 2017 A Form 10-Q, 10-K, 20-F or 6-K was filed from August 10, 2017 to November 9, Disclosure language includes revenue from contracts with customers or new revenue standard. All industries except finance, insurance, real estate, oil and gas, and mining Following the same sampling methodology above, the populations for our November 2016, March 2017, May 2017 and August 2017, studies were 257, 319, 370, and 378 companies, respectively. A summary of the findings is presented below: a) Over 80% of the companies sampled have elected an adoption method and 74% have indicated, on a high-level, whether the adoption will have a material impact or not. These percentages improved by 15~20% since our last study. However, given the limited time remaining to adopt for calendar year-end companies, a significant amount of work seems to remain. b) Among the companies that have disclosed their adoption method, 80% have elected the modified retrospective, with 3 companies that previously elected the full method having switched to the modified method. c) Companies that have early adopted the standard are Alphabet, Diageo, General Dynamics, Ford Motor, Microsoft, Raytheon and Workday. Analog Devices has also decided to early adopt in November d) Only 5% of the companies sampled have disclosed that the adoption will have a material impact. Almost 70% of the companies do not anticipate a material impact. Vast majority of the companies are yet to quantify the aggregate adoption impact. The study includes a list of early adopters and links to their most recent SEC filings. Additionally, disclosure examples from notable early adopters (e.g. Alphabet, Ford, Workday, Microsoft, etc.) and select companies from all industries studied (e.g. GE, Cisco, Best Buy, etc.) with varying levels of quantitative and/or qualitative details have been included.

5 List of Early Adopters 4 Below list includes companies that have adopted ASC 606 (IFRS 15) as of their most recent SEC filing date. This list is identified through key word search within SEC.gov and CompanyIQ and therefore might not represent the complete population of early adopters. # Company Name Adoption Date Adoption Method Industry Link to most recent filing 1 Alphabet, Inc. March 30, 2017 Modified Technology 10-Q 2 AquaBounty Technologies, Inc March 15, 2017 No historical revenue Life science S-1 3 Aradigm Corporation April 1, 2016 Modified Life science 10-Q 4 Bsquare Corporation March 7, 2016 Modified Technology 10-Q 5 Catabasis Pharmaceuticals, Inc. January 1, 2017 No historical revenue Life science 10-Q 6 CBOE Holdings, Inc. January 1, 2017 Full Finance, Insurance & Real Estate 10-Q 7 Commvault Systems, Inc April 1, 2017 Full Technology 10-Q 8 Ecoark Holdings, Inc April 1, 2017 Modified Consumer products 10-Q 9 Ener-Core, Inc January 1, 2017 No historical revenue Industrial products, chemicals, and manufacturing 10-Q 10 EnerNoc, Inc. January 1, 2017 Modified Technology 10-Q 11 Extreme Networks, Inc July 1, 2017 Full Technology 10-Q 12 First Solar, Inc. January 1, 2017 Full Technology 10-Q 13 Ford Motor Company January 1, 2017 Modified Industrial products, chemicals, and manufacturing 10-Q 14 General Dynamics Corporation January 1, 2017 Full Industrial products, chemicals, and manufacturing 10-Q 15 Lipocine, Inc. January 1, 2017 No historical revenue Life science 10-Q

6 List of Early Adopters (Cont d) 5 # Company Name Adoption Date Adoption Method Industry Link to most recent filing 16 Microsoft Corporation July 1, 2017 Full Technology 10-Q 17 Mirati Therapeutics, Inc. January 1, 2017 No historical revenue Life science 10-Q 18 Nutanix, Inc. August 1, 2017 Full Technology 10-Q 19 Pluristem Therapeutics, Inc. July 1, 2017 Modified Life science 10-Q 20 Power Integrations, Inc. January 1, 2017 Full Technology 10-Q 21 Pure Cycle Corporation September 1, 2017 Modified Transportation and utilities 10-Q 22 R1 RCM Inc. January 1, 2017 Modified Wholesale/retailer trade, services and others 10-Q 23 Radius Health, Inc. April 1, 2017 No historical revenue Life science 10-Q 24 Raytheon Company January 1, 2017 Full Industrial products, chemicals, and manufacturing 10-Q 25 Sage Therapeutics, Inc. January 1, 2017 No historical revenue Life science 10-Q 26 Solid Biosciences, Llc January 1, 2017 No historical revenue Life science S-1 27 Strongbridge Bipharma April 1, 2017 No historical revenue Life science 6-K 28 Tesaro, Inc. January 1, 2017 Full Life science 10-Q 29 Ultragenyx Pharmaceutical, Inc. 30 UnitedHealth Group January 1, 2017 Modified 31 Vanguard Natural Resources, Inc January 1, 2017 Full Life science 10-Q August 1, 2017 Modified Finance, Insurance & Real Estate Oil, mining and other energy related 32 Workday, Inc. February 1, 2017 Full Technology 10-Q 33 Zafgen, Inc January 1, 2017 No historical revenue Life science 10-Q 10-Q 10-Q

7 6 SEC Comment Letters ASC 606 (IFRS 15) Adoption and Implementation

8 SEC Comments by Type 7 Type 3: Minor corrections requested (e.g. required adoption date): 10% (4/42 comments) Type 1: A typical example comment is as follows, Please revise to provide qualitative financial statement disclosures of the potential impact that this standard will have on your financial statements when adopted. In this regard, include a description of the effects of the accounting policies that you expect to apply, if determined, and a comparison to your current revenue recognition policies. Describe the status of your process to implement the new standard and the significant implementation matters yet to be addressed. In addition, to the extent that you determine the quantitative impact that adoption of Topic 606 is expected to have on your financial statements, please also disclose such amounts. Please refer to ASC S99-6 and SAB Topic 11.M. Type 1: Request to expand evaluation and implementation status: 55% (23/42 comments) Type 2: Comments for early adopters: 35% (15/42 comments) Type 2: SEC inquiries to early adopters cover the following areas: Rationale for why certain promise is not distinct Considerations in making judgement about contract combination or modification (with request to expand disclosure) Rationale for significant financing component conclusion Justification of selected measure of progress (with request to expand disclosure) Rationale for point-in-time recognition for customized construction contracts (with request to expand disclosure) Rationale for concluding certain consideration payable to customers not accounted for as a reduction of revenue Expand disclosures about (a) significant payment terms and the relation between payment timing and satisfaction of performance obligation and contract balances, (b) variable consideration, (c) remaining performance obligations, (d) balances of capitalized costs to obtain a contract

9 Comment Letter Examples 8 Example of Type 1 - Request to expand evaluation and implementation status Company Name Response Date Link to response letter and Question # 1. First Data Corp April 17, 2017 Question 5 2. NASDAQ, Inc April 13, 2017 Question 1 Other companies received similar Type 1 comments: Mastec, Inc. Legget & Platt, Inc. Monster Beverage Corp IAC/InterActive Corp ONEOK Partners LP Vermillion, Inc. ONEOK, Inc. MKS Instruments, Inc. Guaranty Bancshares, Inc. United Therapeutics Corp Community Health Systems, Inc. Integer Holdings Corporation Ctrip.com International, Ltd Roku, Inc. Snap, Inc. Black Knight, Inc. SenesTech, Inc. Altice USA, Inc. RYB Education, Inc. AGM Group Holdings, Inc. Co-Diagnostics, Inc.

10 Comment Letter Examples (Cont d) 9 Full list of Type 2 Comments to early adopters Company Name Response Date Link to response letter and Question # 1. General Dynamics Corp September 7, 2017 Question 1-6 October 19, 2017 Question 1 2. First Solar, Inc. August 17, 2017 Question Workday, Inc. August 8, 2017 Question CBOE Global Markets, Inc. September 1, 2017 Question 1-2 Full list of Type 3 Minor corrections requested Company Name Response Date Link to response letter and Question # 1. BioLargo, Inc. March 30, 2017 Question Veritone, Inc. March 15, 2017 Question 3 3. BeautyKind Holdings, Inc. April 1, 2016 Question QMC Systems, Inc. March 7, 2016 Question 4* * Response letter to this SEC letter is not available on SEC.gov as of the date of this study.

11 10 SAB 74 Disclosure Trend ASC 606 (IFRS 15) Methods, Dates, and Anticipated Impact

12 Sampled Companies by Industry % % 16% % 10% 9% 8% 0 a b c d e f g From left to right: a. Transportation and utilities b. Technology c. Industrial products, chemicals and manufacturing d. Life sciences (biotechnology, pharmaceuticals, medical devices) e. Wholesale, retail, services and other f. Consumer products g. Entertainment, media and communications

13 Anticipated Adoption Method % 80% 60% 40% 20% 0% 59/324 companies Notable companies: - Raytheon (adopted) - General Dynamics (adopted) - Workday (adopted) - Microsoft (adopted) - Apple - GE - Oracle - Boeing - American Airline - Intuitive Surgical 17% 18% 14% 11% 4% 5% 209/324 companies Notable companies: - Alphabet (adopted) - Ford (adopted) - Nike - Amazon - AT&T - Facebook - Priceline 49% - IBM - Dow Chemical - AbbVie 34% 29% Full Retrospective Modified Retrospective Still Assessing Nov'16 Study Mar'17 Study May'17 Study Aug'17 Study Dec'17 Study (Current) Full Retrospective = recast all comparative periods presented in the post-adoption financial statements; Modified Retrospective = cumulative-effect adjustment to retained earnings in the period of adoption for prior periods effects The percentage of companies that have determined an adoption method has increased by 17% since our last study. Approximately 80% of the companies that disclosed an adoption method have elected to use the modified retrospective method. Three companies (Netflix, International Paper, and Sherwin-Williams) have switched the adoption method previously elected from full retrospective to modified retrospective over the past two quarters. 1 company (Yum! Brands) has switched from full retrospective to still assessing. Some companies who have elected full retrospective have continued to indicate that their ability to apply full retrospective method depends on system readiness and the completion of the analysis of information necessary to restate prior periods. There are 16 companies that expect a material adoption impact and also have elected an adoption method. Over 60% of them (10 companies) have chosen the full retrospective. On the other hand, there are 199 companies that expect that the adoption will not be material and also have determined an adoption method. Over 80% of them (161 companies) have chosen the modified retrospective. For early adopters, 5 out of 7 companies elected the full retrospective method. 65% 91% 60% 52% 56/324 companies 34% 17%

14 Anticipated Adoption Date % 100% 85% 315/324 companies 96% 97% 93% 80% 60% 40% 20% 0% 2% 7/324 companies: - Alphabet (adopted) - General Dynamics (adopted) - Ford (adopted) - Raytheon (adopted) - Workday (adopted) - Microsoft (adopted) - Analog Devices (early adopt in Nov. 17) 2% 2% 2% 2% 35% Early Adoption Standard Adoption Not Specified Nov'16 Study Mar'17 Study May'17 Study Aug'17 Study Dec '17 Study (Current) 63% 13% 5% 2% 2/324 companies 1% 7 companies that issued SEC filings during our current study date range have elected to early adopt the new standard. Among the 6 companies that have adopted the standard, 5 of them disclosed an immaterial impact. The not specified group has decreased by 1% since our last study. This is an expected trend as currently the early adoption is essentially only available for a small subset of companies that have an off-calendar year-end date. Among the 315 companies within the standard adoption group, 66% (209 companies, comprising of 68% of US GAAP companies sampled and 10% of IFRS companies sampled) have disclosed both the high-level adoption impact and an adoption method. This percentage has increased by 15~20% per quarter for the past 2 quarters. 9% (28 companies, comprising of 6% of US GAAP companies sampled and 50% of IFRS companies sampled) have not determined the high-level adoption impact nor an adoption method. Such percentage has decreased by approximately 10~15% per quarter for the past 2 quarters.

15 Anticipated Adoption Impact % 80% 60% 40% 20% 4% 8% 6% 17/324 companies Notable companies: - Boeing - T-Mobile - American Airlines - Hilton Worldwide Holdings - Electronic Arts 5% 5% 9% 222/324 companies Notable companies: - IBM - Procter & Gamble - Amgen - Best Buy - Johnson & Johnson 54% 42% 43% 69% 87% 50% 51% 85/324 41% companies 26% 0% Material Not Material Still Assessing Nov'16 Study Mar'17 Study May'17 Study Aug'17 Study Dec'17 Study (Current) Overall, we have seen progress in companies disclosures about high-level adoption impacts. Additionally, discussions about specific impacted areas or revenue streams have been enhanced in many cases. 25% of the IFRS companies sampled and 77% of the US GAAP companies sampled have discussed their preliminary conclusion as to whether they anticipate a significant adoption impact. In addition, for the still assessing group, 52% (44 companies) have elected the modified retrospective method and 13% (11 companies) have elected the full retrospective method. Compared with our last study, the percentage for the modified retrospective group has increased by over 10% while that percentage for full retrospective group remains the same. Vast majority of the companies sampled are yet to disclose quantitative adoption impact. A small number of companies have started to include estimated quantitative impact in the MD&A section. Companies continue to caveat their potential impact disclosures that the company s current assessment is preliminary, still ongoing, and subject to change. Please refer to Exhibit II Common Impact Areas and Illustrative Pre-adoption Disclosures for common adoption impact areas by industry.

16 Adoption Method Top 15 Technology Companies 15 Full Retrospective Salesforce Apple Oracle Microsoft (Adopted) Modified Retrospective Intel Priceline Alphabet (Adopted) Facebook IBM Accenture Cisco Systems Texas Instruments Netflix Not Specified NTT DoCoMo Taiwan Semiconductor Manufacturing Co Not Specified Immaterial Material Adoption Impact Top 15 technology companies were selected based on market capitalization at the later of (a) companies most recent fiscal year end or (b) June 30, 2017 (Source: MyLogIQ) 3 more companies have moved into the dot-shaded zone (right top corner) since our last study.

17 Adoption Method Top 15 Life Sciences Companies 16 Full Retrospective Modified Retrospective Abbott Laboratories AbbVie Allergan Amgen Celgene Eli Lily Gilead Sciences Johnson & Johnson 3M Merck Pfizer Medtronic Biogen Bristol Myers Squibb Not Specified GlaxoSmithKline Not Specified Immaterial Material Adoption Impact Top 15 life science companies were selected based on market capitalization at the later of (a) companies most recent fiscal year end or (b) June 30, 2017 (Source: MyLogIQ) 3 more companies have moved into the dot-shaded zone (top right corner) since our last study.

18 Summary of Exhibits 17 Description Link Post-adoption Disclosures Examples 1. Alphabet (modified retrospective, third Form 10-Q filed after adoption) Exhibit I Ford (modified retrospective, third Form 10-Q filed after adoption) Exhibit I 2 3. General Dynamics (full retrospective, third Form 10-Q filed after adoption) Exhibit I 3 4. Workday (full retrospective, second Form 10-Q filed after adoption) Exhibit I Microsoft (full retrospective, first Form 10-Q filed after adoption) Exhibit I - 5 Common Impact Areas and Illustrative Pre-adoption Disclosures AA. All industries Exhibit II A. Technology Exhibit II - A B. Industrial products, chemicals, and manufacturing Exhibit II B C. Transportation and utilities Exhibit II C D. Life sciences (biotechnology, pharmaceuticals, medical devices) Exhibit II D E. Entertainment, media and communications Exhibit II E F. Wholesale, retail, services and other Exhibit II F G. Consumer products Exhibit II - G Disclosure Example Color Legend: Adoption date or method; Adoption impact; Other Topic 606 related disclosures

19 18 Exhibit I Post-adoption Disclosure Examples

20 Exhibit I Post-adoption Disclosure 19 Adoption of ASC Topic 606, "Revenue from Contracts with Customers" On January 1, 2017, we adopted Topic 606 using the modified retrospective method applied to those contracts which were not completed as of January 1, Results for reporting periods beginning after January 1, 2017 are presented under Topic 606, while prior period amounts are not adjusted and continue to be reported in accordance with our historic accounting under Topic 605. We recorded a net reduction to opening retained earnings of $15 million as of January 1, 2017 due to the cumulative impact of adopting Topic 606, with the impact primarily related to our non-advertising revenues. The impact to revenues as a result of applying Topic 606 was an increase of $10 million and $32 million for the three and nine months ended September 30, 2017, respectively. Revenue Recognition Revenues are recognized when control of the promised goods or services is transferred to our customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services. The following table presents our revenues disaggregated by revenue source (in millions, unaudited). Sales and usage-based taxes are excluded from revenues:

21 Exhibit I Post-adoption Disclosure (Cont d) 20 (1) As noted above, prior period amounts have not been adjusted under the modified retrospective method. (2) Revenues include hedging gains (losses) of $105 million and $(191) million for the three months ended September 30, 2016 and 2017, respectively, and $352 million and $29 million for the nine months ended September 30, 2016 and 2017, respectively, which do not represent revenues recognized from contracts with customers. The following table presents our revenues disaggregated by geography, based on the billing addresses of our customers (in millions, unaudited): (1) Regions represent Europe, the Middle East, and Africa (EMEA); Asia-Pacific (APAC); and Canada and Latin America (Other Americas). (2) Revenues include hedging gains (losses) for the three and nine months ended September 30, 2016 and 2017.

22 Exhibit I Post-adoption Disclosure (Cont d) 21 Advertising Revenues We generate revenues primarily by delivering advertising on Google properties and Google Network Members properties.... Most of our customers pay us on a cost-per-click basis (CPC), which means that an advertiser pays us only when a user clicks on an ad on Google properties or Google Network Members' properties or views certain YouTube ad formats like TrueView. For these customers, we recognize revenue each time a user clicks on the ad or when a user views the ad for a specified period of time. We also offer advertising on other bases such as cost-per-impression (CPM), which means an advertiser pays us based on the number of times their ads are displayed on Google properties or Google Network Members properties. For these customers, we recognize revenue each time an ad is displayed. Certain customers may receive cash-based incentives or credits, which are accounted for as variable consideration. We estimate these amounts based on the expected amount to be provided to customers and reduce revenues recognized. We believe that there will not be significant changes to our estimates of variable consideration. For ads placed on Google Network Members properties, we evaluate whether we are the principal (i.e., report revenues on a gross basis) or agent (i.e., report revenues on a net basis). Generally, we report advertising revenues for ads placed on Google Network Members properties on a gross basis, that is, the amounts billed to our customers are recorded as revenues, and amounts paid to publishers are recorded as cost of revenues. Where we are the principal because we control the advertising inventory before it is transferred to our customers. Our control is evidenced by our sole ability to monetize the advertising inventory before it is transferred to our customers, and is further supported by us being primarily responsible to our customers and having a level of discretion in establishing pricing.

23 Exhibit I Post-adoption Disclosure (Cont d) 22 Other Revenues As it relates to Google other revenues, the most significant judgment is determining whether we are the principal or agent for app sales and in-app purchases through the Google Play store. We report revenues from these transactions on a net basis because our performance obligation is to facilitate a transaction between app developers and end users, for which we earn a commission. Consequently, the portion of the gross amount billed to end users that is remitted to app developers is not reflected as revenues. Arrangements with Multiple Performance Obligations Our contracts with customers may include multiple performance obligations. For such arrangements, we allocate revenue to each performance obligation based on its relative standalone selling price. We generally determine standalone selling prices based on the prices charged to customers or using expected cost plus margin. Deferred Revenues We record deferred revenues when cash payments are received or due in advance of our performance, including amounts which are refundable. The increase in the deferred revenue balance for the nine months ended September 30, 2017 is primarily driven by cash payments received or due in advance of satisfying our performance obligations, offset by $779 million of revenues recognized that were included in the deferred revenue balance as of December 31, Our payment terms vary by the type and location of our customer and the products or services offered. The term between invoicing and when payment is due is not significant. For certain products or services and customer types, we require payment before the products or services are delivered to the customer.

24 Exhibit I Post-adoption Disclosure (Cont d) 23 Practical Expedients and Exemptions We generally expense sales commissions when incurred because the amortization period would have been one year or less. These costs are recorded within sales and marketing expenses. We do not disclose the value of unsatisfied performance obligations for (i) contracts with an original expected length of one year or less and (ii) contracts for which we recognize revenue at the amount to which we have the right to invoice for services performed. [Emphasis added]

25 Exhibit I Post-adoption Disclosure (Cont d) 24 NEW ACCOUNTING STANDARDS ASU , Revenue - Revenue from Contracts with Customers. On January 1, 2017, we adopted the new accounting standard ASC 606, Revenue from Contracts with Customers and all the related amendments ( new revenue standard ) to all contracts using the modified retrospective method. We recognized the cumulative effect of initially applying the new revenue standard as an adjustment to the opening balance of retained earnings. The comparative information has not been restated and continues to be reported under the accounting standards in effect for those periods. We expect the impact of the adoption of the new standard to be immaterial to our net income on an ongoing basis. A majority of our sales revenue continues to be recognized when products are shipped from our manufacturing facilities. For certain vehicle sales where revenue was previously deferred, such as vehicles subject to a guaranteed resale value recognized as a lease and transactions in which a Ford-owned entity delivered vehicles, we now recognize revenue when vehicles are shipped. The cumulative effect of the changes made to our consolidated January 1, 2017 balance sheet for the adoption of ASU , Stock Compensation - Improvements to Employee Share-Based Payment Accounting and ASU , Revenue - Revenue from Contracts with Customers were as follows (in millions):

26 Exhibit I Post-adoption Disclosure (Cont d) 25 In accordance with the new revenue standard requirements, the disclosure of the impact of adoption on our consolidated income statement and balance sheet for the periods ended September 30, 2017 was as follows (in millions):

27 Exhibit I Post-adoption Disclosure (Cont d) 26

28 Exhibit I Post-adoption Disclosure (Cont d) 27 REVENUE The following table disaggregates our revenue by major source for the periods ended September 30, 2017 (in millions):

29 Exhibit I Post-adoption Disclosure (Cont d) 28 REVENUE The following table disaggregates our revenue by major source (in millions): Revenue is recognized when obligations under the terms of a contract with our customer are satisfied; generally this occurs with the transfer of control of our vehicles, parts, accessories, or services. Revenue is measured as the amount of consideration we expect to receive in exchange for transferring goods or providing services. Sales, value add, and other taxes we collect concurrent with revenue-producing activities are excluded from revenue. Incidental items that are immaterial in the context of the contract are recognized as expense. The expected costs associated with our base warranties and field service actions continue to be recognized as expense when the products are sold (see Note 16). We recognize revenue for vehicle service contracts that extend mechanical and maintenance beyond our base warranties over the life of the contract. We do not have any material significant payment terms as payment is received at or shortly after the point of sale.

30 Exhibit I Post-adoption Disclosure (Cont d) 29 REVENUE Automotive Segment Vehicles, Parts, and Accessories. For the majority of vehicles, parts, and accessories, we transfer control and recognize a sale when we ship the product from our manufacturing facility to our customer (dealers and distributors). We receive cash equal to the invoice price for most vehicle sales at the time of wholesale. When the vehicle sale is financed by our wholly-owned subsidiary Ford Credit, the dealer pays Ford Credit when it sells the vehicle to the retail customer (see Note 8). Payment terms on part sales to dealers, distributors, and retailers range from 30 days to 120 days. The amount of consideration we receive and revenue we recognize varies with changes in marketing incentives and returns we offer to our customers and their customers. When we give our dealers the right to return eligible parts and accessories, we estimate the expected returns based on an analysis of historical experience. We adjust our estimate of revenue at the earlier of when the most likely amount of consideration we expect to receive changes or when the consideration becomes fixed. As a result we recognized an increase to revenue from prior periods in the third quarter of 2017 of $33 million. Depending on the terms of the arrangement, we may also defer the recognition of a portion of the consideration received because we have to satisfy a future obligation (e.g., free extended service contracts). We use an observable price to determine the standalone selling price for separate performance obligations or a cost plus margin approach when one is not available. We have elected to recognize the cost for freight and shipping when control over vehicles, parts, or accessories have transferred to the customer as an expense in Cost of sales. We sell vehicles to daily rental companies and guarantee that we will pay them the difference between an agreed amount and the value they are able to realize upon resale. At the time of transfer of vehicles to the daily rental companies, we record the probable amount we will pay under the guarantee to Other liabilities and deferred revenue. Used Vehicles. We sell used vehicles both at auction and through our consolidated dealerships. Proceeds from the sale of these vehicles are recognized in Automotive revenues upon transfer of control of the vehicle to the customer and the related vehicle carrying value is recognized in Cost of sales.

31 Exhibit I Post-adoption Disclosure (Cont d) 30 REVENUE Extended Service Contracts. We sell separately-priced service contracts that extend mechanical and maintenance coverages beyond our base warranty agreements to vehicle owners. The separately priced service contracts range from 12 months to 120 months. We receive payment at the inception of the contract and recognize revenue over the term of the agreement in proportion to the costs expected to be incurred in satisfying the obligations under the contract. At January 1, 2017, $3.5 billion of unearned revenue associated with outstanding contracts was reported in Other Liabilities and deferred revenue, $256 million and $797 million of this was recognized as revenue during the third quarter and first nine months of 2017, respectively. At September 30, 2017, the unearned amount was $3.7 billion. We expect to recognize approximately $300 million of the unearned amount in 2017, $1 billion in 2018, and $2.4 billion thereafter. We record a premium deficiency reserve to the extent we estimate the future costs associated with these contracts exceed the unrecognized revenue. Amounts paid to dealers to obtain these contracts are deferred and recorded as Other assets. These costs are amortized to expense consistent with how the related revenue is recognized. We had a balance of $236 million in deferred costs as of September 30, 2017 and recognized $17 million and $46 million of amortization during the third quarter and first nine months of 2017, respectively. Other Revenue. Other revenue consists primarily of net commissions received for serving as the agent in facilitating the sale of a third party s products or services to our customers and payments for vehicle-related design and testing services we perform for others. We have applied the practical expedient to recognize Automotive revenues for vehicle-related design and testing services over the two to three year term of these agreements in proportion to the amount we have the right to invoice. Leasing Income. We sell vehicles to daily rental companies with an obligation to repurchase the vehicles for a guaranteed amount, exercisable at the option of the customer. The transactions are accounted for as operating leases. Upon the transfer of vehicles to the daily rental companies, we record proceeds received in Other liabilities and deferred revenue. The difference between the proceeds received and the guaranteed repurchase amount is recorded in Automotive revenues over the term of the lease using a straight-line method. The cost of the vehicle is recorded in Net investment in operating leases on our consolidated balance sheet and the difference between the cost of the vehicle and the estimated auction value is depreciated in Cost of sales over the term of the lease.

32 Exhibit I Post-adoption Disclosure (Cont d) 31 REVENUE Financial Services Segment Leasing Income. Ford Credit offers leasing plans to retail consumers through Ford and Lincoln brand dealers who originate the leases. Upon the purchase of a lease from the dealer, Ford Credit takes ownership of the vehicle and records an operating lease. The retail consumer makes lease payments representing the difference between Ford Credit s purchase price of the vehicle and the contractual residual value of the vehicle, plus lease fees that we recognize on a straight-line basis over the term of the lease agreement. Depreciation and the gain or loss upon disposition of the vehicle is recorded in Financial Services interest, operating, and other expenses. Financing Income. Ford Credit originates and purchases finance installment contracts. Financing income represents interest earned on the finance receivables (including direct financing leases). Interest is recognized using the interest method, and includes the amortization of certain direct origination costs. Insurance Income. Income from insurance contracts is recognized evenly over the term of the agreement. Insurance commission revenue is recognized on a net basis at the time of sale of the third party s product or service to our customer. [Emphasis added]

33 Exhibit I Post-adoption Disclosure (Cont d) 32 REVENUE The majority of our revenue is derived from long-term contracts and programs that can span several years. We account for revenue in accordance with ASC Topic 606, Revenue from Contracts with Customers, which we adopted on January 1, 2017, using the retrospective method. See Note Q for further discussion of the adoption, including the impact on our 2016 financial statements. Performance Obligations. A performance obligation is a promise in a contract to transfer a distinct good or service to the customer, and is the unit of account in ASC Topic 606. A contract s transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. The majority of our contracts have a single performance obligation as the promise to transfer the individual goods or services is not separately identifiable from other promises in the contracts and, therefore, not distinct. Some of our contracts have multiple performance obligations, most commonly due to the contract covering multiple phases of the product lifecycle (development, production, maintenance and support). For contracts with multiple performance obligations, we allocate the contract s transaction price to each performance obligation using our best estimate of the standalone selling price of each distinct good or service in the contract. The primary method used to estimate standalone selling price is the expected cost plus a margin approach, under which we forecast our expected costs of satisfying a performance obligation and then add an appropriate margin for that distinct good or service. Contract modifications are routine in the performance of our contracts. Contracts are often modified to account for changes in the contract specifications or requirements. In most instances, contract modifications are for goods or services that are not distinct, and, therefore, are accounted for as part of the existing contract.

34 Exhibit I Post-adoption Disclosure (Cont d) 33 REVENUE Our performance obligations are satisfied over time as work progresses or at a point in time. Revenue from products and services transferred to customers over time accounted for 70% of our revenue for the three- and nine-month periods ended October 1, 2017, and 72% and 71% of our revenue for the three- and nine-month periods ended October 2, 2016, respectively. Substantially all of our revenue in the defense groups is recognized over time because control is transferred continuously to our customers. Typically, revenue is recognized over time using costs incurred to date relative to total estimated costs at completion to measure progress toward satisfying our performance obligations. Incurred cost represents work performed, which corresponds with, and thereby best depicts, the transfer of control to the customer. Contract costs include labor, material, overhead and, when appropriate, G&A expenses. Revenue from goods and services transferred to customers at a point in time accounted for 30% of our revenue for the three- and nine-month periods ended October 1, 2017, and 28% and 29% of our revenue for the three- and nine-month periods ended October 2, 2016, respectively. The majority of our revenue recognized at a point in time is for the manufacture of business-jet aircraft in our Aerospace group. Revenue on these contracts is recognized when the customer obtains control of the asset, which is generally upon delivery and acceptance by the customer of the fully outfitted aircraft. On October 1, 2017, we had $63.9 billion of remaining performance obligations, which we also refer to as total backlog. We expect to recognize approximately 50% of our remaining performance obligations as revenue by 2018, an additional 30% by 2020 and the balance thereafter.

35 Exhibit I Post-adoption Disclosure (Cont d) 34 REVENUE Contract Estimates. Accounting for long-term contracts and programs involves the use of various techniques to estimate total contract revenue and costs. For long-term contracts, we estimate the profit on a contract as the difference between the total estimated revenue and expected costs to complete a contract and recognize that profit over the life of the contract. Contract estimates are based on various assumptions to project the outcome of future events that often span several years. These assumptions include labor productivity and availability; the complexity of the work to be performed; the cost and availability of materials; the performance of subcontractors; and the availability and timing of funding from the customer. The nature of our contracts gives rise to several types of variable consideration, including claims and award and incentive fees. We include in our contract estimates additional revenue for submitted contract modifications or claims against the customer when we believe we have an enforceable right to the modification or claim, the amount can be estimated reliably and its realization is probable. In evaluating these criteria, we consider the contractual/legal basis for the claim, the cause of any additional costs incurred, the reasonableness of those costs and the objective evidence available to support the claim. We include award or incentive fees in the estimated transaction price when there is a basis to reasonably estimate the amount of the fee. These estimates are based on historical award experience, anticipated performance and our best judgment at the time. Because of our certainty in estimating these amounts, they are included in the transaction price of our contracts and the associated remaining performance obligations.

36 Exhibit I Post-adoption Disclosure (Cont d) 35 REVENUE As a significant change in one or more of these estimates could affect the profitability of our contracts, we review and update our contract-related estimates regularly. We recognize adjustments in estimated profit on contracts under the cumulative catch-up method. Under this method, the impact of the adjustment on profit recorded to date on a contract is recognized in the period the adjustment is identified. Revenue and profit in future periods of contract performance are recognized using the adjusted estimate. If at any time the estimate of contract profitability indicates an anticipated loss on the contract, we recognize the total loss in the quarter it is identified. The impact of adjustments in contract estimates on our operating earnings can be reflected in either operating costs and expenses or revenue. The aggregate impact of adjustments in contract estimates increased our revenue, operating earnings and diluted earnings per share as follows: No adjustment on any one contract was material to our unaudited Consolidated Financial Statements for the three- and nine-month periods ended October 1, 2017, and October 2, Revenue by Category. Our portfolio of products and services consists of over 10,000 active contracts. The following series of tables presents our revenue disaggregated by several categories.

37 Exhibit I Post-adoption Disclosure (Cont d) 36 REVENUE Revenue by major product line was as follows:

38 Exhibit I Post-adoption Disclosure (Cont d) 37 REVENUE Revenue by contract type was as follows:

39 Exhibit I Post-adoption Disclosure (Cont d) 38 REVENUE Revenue by contract type was as follows: Each of these contract types presents advantages and disadvantages. Typically, we assume more risk with fixed-price contracts. However, these types of contracts offer additional profits when we complete the work for less than originally estimated. Cost-reimbursement contracts generally subject us to lower risk. Accordingly, the associated base fees are usually lower than fees earned on fixed-price contracts. Under time-and-materials contracts, our profit may vary if actual labor-hour costs vary significantly from the negotiated rates. Also, because these contracts can provide little or no fee for managing material costs, the content mix can impact profitability.

40 Exhibit I Post-adoption Disclosure (Cont d) 39 REVENUE Revenue by customer was as follows:

41 Exhibit I Post-adoption Disclosure (Cont d) 40 REVENUE Revenue by customer was as follows:

42 Exhibit I Post-adoption Disclosure (Cont d) 41 REVENUE Contract Balances. The timing of revenue recognition, billings and cash collections results in billed accounts receivable, unbilled receivables (contract assets), and customer advances and deposits (contract liabilities) on the Consolidated Balance Sheet. In our defense groups, amounts are billed as work progresses in accordance with agreed-upon contractual terms, either at periodic intervals (e.g., biweekly or monthly) or upon achievement of contractual milestones. Generally, billing occurs subsequent to revenue recognition, resulting in contract assets. However, we sometimes receive advances or deposits from our customers, particularly on our international contracts, before revenue is recognized, resulting in contract liabilities. These assets and liabilities are reported on the Consolidated Balance Sheet on a contractby-contract basis at the end of each reporting period. In our Aerospace group, we generally receive deposits from customers upon contract execution and upon achievement of contractual milestones. These deposits are liquidated when revenue is recognized. Changes in the contract asset and liability balances during the nine-month period ended October 1, 2017, were not materially impacted by any other factors. Revenue recognized for the three- and nine-month periods ended October 1, 2017, and October 2, 2016, that was included in the contract liability balance at the beginning of each year was $982 and $3.9 billion, and $911 and $3.7 billion, respectively. This revenue represented primarily the sale of business-jet aircraft. PRIOR-PERIOD FINANCIAL STATEMENTS ASC Topic 606. We adopted ASC Topic 606 on January 1, 2017, using the retrospective method. The adoption of ASC Topic 606 had two primary impacts on our Consolidated Financial Statements. The impact of adjustments on profit recorded to date is now recognized in the period identified (cumulative catch-up method), rather than prospectively over the remaining contract term. For our contracts for the manufacture of business-jet aircraft, we now recognize revenue at a single point in time when control is transferred to the customer, generally upon delivery and acceptance of the fully outfitted aircraft. Prior to the adoption of ASC Topic 606, we recognized revenue for these contracts at two contractual milestones: when green aircraft were completed and accepted by the customer and when the customer accepted final delivery of the fully outfitted aircraft. The cumulative effect of the adoption was recognized as a decrease to retained earnings of $372 on January 1, 2015.

43 Exhibit I Post-adoption Disclosure (Cont d) 42 PRIOR-PERIOD FINANCIAL STATEMENTS ASC Topic 606. We adopted ASC Topic 606 on January 1, 2017, using the retrospective method. The adoption of ASC Topic 606 had two primary impacts on our Consolidated Financial Statements. The impact of adjustments on profit recorded to date is now recognized in the period identified (cumulative catch-up method), rather than prospectively over the remaining contract term. For our contracts for the manufacture of business-jet aircraft, we now recognize revenue at a single point in time when control is transferred to the customer, generally upon delivery and acceptance of the fully outfitted aircraft. Prior to the adoption of ASC Topic 606, we recognized revenue for these contracts at two contractual milestones: when green aircraft were completed and accepted by the customer and when the customer accepted final delivery of the fully outfitted aircraft. The cumulative effect of the adoption was recognized as a decrease to retained earnings of $372 on January 1, We applied the standard's practical expedient that permits the omission of prior-period information about our remaining performance obligations. No other practical expedients were applied.

44 Exhibit I Post-adoption Disclosure (Cont d) 43 PRIOR-PERIOD FINANCIAL STATEMENTS The following tables summarize the effects of adopting these accounting standards on our unaudited Consolidated Financial Statements. Consolidated Statement of Earnings (Unaudited)

45 Exhibit I Post-adoption Disclosure (Cont d) 44 PRIOR-PERIOD FINANCIAL STATEMENTS The following tables summarize the effects of adopting these accounting standards on our unaudited Consolidated Financial Statements. Consolidated Statement of Earnings (Unaudited)

46 Exhibit I Post-adoption Disclosure (Cont d) 45 PRIOR-PERIOD FINANCIAL STATEMENTS Consolidated Statement of Earnings (Unaudited)

47 Exhibit I Post-adoption Disclosure (Cont d) 46 PRIOR-PERIOD FINANCIAL STATEMENTS Consolidated Statement of Comprehensive Income (Unaudited)

48 Exhibit I Post-adoption Disclosure (Cont d) 47 PRIOR-PERIOD FINANCIAL STATEMENTS Consolidated Balance Sheet (Unaudited)

49 Exhibit I Post-adoption Disclosure (Cont d) 48 PRIOR-PERIOD FINANCIAL STATEMENTS Consolidated Statement of Cash Flow (Unaudited)

50 Exhibit I Post-adoption Disclosure (Cont d) 49 Consolidated Statement of Shareholders Equity (Unaudited) [Emphasis added]

51 Exhibit I Post-adoption Disclosure (Cont d) 50 We early adopted the requirements of the new standard as of February 1, 2017, utilizing the full retrospective method of transition. Adoption of the new standard resulted in changes to our accounting policies for revenue recognition, trade and other receivables, and deferred commissions as detailed below. We applied the new standard using a practical expedient where the consideration allocated to the remaining performance obligations or an explanation of when we expect to recognize that amount as revenue for all reporting periods presented before the date of the initial application is not disclosed. The impact of adopting the new standard on our fiscal 2017 and fiscal 2016 revenues is not material. The primary impact of adopting the new standard relates to the deferral of incremental commission costs of obtaining subscription contracts. Under Topic 605, we deferred only direct and incremental commission costs to obtain a contract and amortized those costs over the term of the related subscription contract, which was generally three years or longer. Under the new standard, we defer all incremental commission costs to obtain the contract. We amortize these costs on a straight-line basis over a period of benefit that we have determined to be five years or the related contractual renewal period, depending on whether the contract is an initial or renewal contract, respectively.

52 Exhibit I Post-adoption Disclosure (Cont d) 51 We adjusted our condensed consolidated financial statements from amounts previously reported due to the adoption of ASU No and ASU No Select condensed consolidated balance sheet line items, which reflect the adoption of the new ASU s are as follows (in thousands):

53 Exhibit I Post-adoption Disclosure (Cont d) 52 Select unaudited condensed consolidated statement of operations line items, which reflect the adoption of the new ASUs are as follows (in thousands except per share data):

54 Exhibit I Post-adoption Disclosure (Cont d) 53

55 Exhibit I Post-adoption Disclosure (Cont d) 54 Select unaudited condensed consolidated statement of cash flows line items, which reflect the adoption of the new ASUs are as follows (in thousands):

56 Exhibit I Post-adoption Disclosure (Cont d) 55 a. Adjusted to reflect the adoption of ASU No , Revenue from Contracts with Customers. b. Adjusted to reflect the adoption of ASU No , Statement of Cash Flows, Restricted Cash.

57 Exhibit I Post-adoption Disclosure (Cont d) 56 Summary of Significant Accounting Policies Revenue Recognition We derive our revenues primarily from subscription services and professional services. Revenues are recognized when control of these services is transferred to our customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those services. Subscription Services Revenues Subscription services revenues primarily consist of fees that provide customers access to one or more of our cloud applications for finance, human resources, and analytics, with routine customer support. Revenue is generally recognized over time on a ratable basis over the contract term beginning on the date that our service is made available to the customer. Our subscription contracts are generally three years or longer in length, billed annually in advance, and non-cancelable. Professional Services Revenues Professional services revenues primarily consist of fees for deployment and optimization services, as well as training. The majority of our consulting contracts are billed on a time and materials basis and revenue is recognized over time as the services are performed. For contracts billed on a fixed price basis, revenue is recognized over time based on the proportion performed. Contracts with Multiple Performance Obligations Some of our contracts with customers contain multiple performance obligations. For these contracts, we account for individual performance obligations separately if they are distinct. The transaction price is allocated to the separate performance obligations on a relative standalone selling price basis. We determine the standalone selling prices based on our overall pricing objectives, taking into consideration market conditions and other factors, including the value of our contracts, the cloud applications sold, customer demographics, geographic locations, and the number and types of users within our contracts.

58 Exhibit I Post-adoption Disclosure (Cont d) 57 Trade and Other Receivables Trade and other receivables are primarily comprised of trade receivables that are recorded at the invoice amount, net of an allowance for doubtful accounts, which is not material. Other receivables represent unbilled receivables related to subscription and professional services contracts. Deferred Commissions Sales commissions earned by our sales force are considered incremental and recoverable costs of obtaining a contract with a customer. Sales commissions for initial contracts are deferred and then amortized on a straight-line basis over a period of benefit that we have determined to be five years. We determined the period of benefit by taking into consideration our customer contracts, our technology and other factors. Sales commissions for renewal contracts are deferred and then amortized on a straight-line basis over the related contractual renewal period. Amortization expense is included in Sales and marketing expenses in the accompanying condensed consolidated statements of operations. Unearned Revenue and Performance Obligations $398 million and $282 million of subscription services revenue was recognized during the three months ended July 31, 2017 and 2016, respectively, that was included in the unearned revenue balances at the beginning of the respective periods. $759 million and $533 million of subscription services revenue was recognized during the six months ended July 31, 2017 and 2016, respectively, that was included in the unearned revenue balances at the beginning of the respective periods. Professional services revenue recognized in the same periods from unearned revenue balances at the beginning of the respective periods was not material.

59 Exhibit I Post-adoption Disclosure (Cont d) 58 Transaction Price Allocated to the Remaining Performance Obligations As of July 31, 2017, approximately $4.4 billion of revenue is expected to be recognized from remaining performance obligations for subscription contracts. We expect to recognize revenue on approximately two thirds of these remaining performance obligations over the next 24 months, with the balance recognized thereafter. Revenue from remaining performance obligations for professional services contracts as of July 31, 2017 was not material.

60 Exhibit I Post-adoption Disclosure (Cont d) 59 Disaggregation of Revenue We sell our subscription contracts and related services in two primary geographical markets: to customers located in the United States, and to customers located outside of the United States. Revenue by geography is generally based on the address of the customer as specified in our master subscription agreement. The following table sets forth revenue by geographic area (in thousands): No single country other than the United States had revenues greater than 10% of total revenues for the three and six months ended July 31, 2017 and No customer individually accounted for more than 10% of our trade and other receivables, net as of July 31, 2017 or January 31, [Emphasis added]

61 Exhibit I Post-adoption Disclosure (Cont d) 60 We elected to early adopt the standard effective July 1, 2017, using the full retrospective method, which required us to restate each prior reporting period presented. We implemented internal controls and key system functionality to enable the preparation of financial information on adoption. The most significant impact of the standard relates to our accounting for software license revenue. Specifically, for Windows 10, we recognize revenue predominantly at the time of billing and delivery rather than ratably over the life of the related device. For certain multi-year commercial software subscriptions that include both distinct software licenses and SA, we recognize license revenue at the time of contract execution rather than over the subscription period. Due to the complexity of certain of our commercial license subscription contracts, the actual revenue recognition treatment required under the standard depends on contract-specific terms and in some instances may vary from recognition at the time of billing. Revenue recognition related to our hardware, cloud offerings (such as Office 365), LinkedIn, and professional services remains substantially unchanged. Adoption of the standard using the full retrospective method required us to restate certain previously reported results, including the recognition of additional revenue and an increase in the provision for income taxes, primarily due to the net change in Windows 10 revenue recognition. In addition, adoption of the standard resulted in an increase in accounts receivable and other current and long-term assets, driven by unbilled receivables from upfront recognition of revenue for certain multi-year commercial software subscriptions that include both distinct software licenses and Software Assurance; a reduction of unearned revenue, driven by the upfront recognition of license revenue from Windows 10 and certain multi-year commercial software subscriptions; and an increase in deferred income taxes, driven by the upfront recognition of revenue. Refer to Impacts to Previously Reported Results below for the impact of adoption of the standard on our consolidated financial statements.

62 Exhibit I Post-adoption Disclosure (Cont d) 61 Impacts to Previously Reported Results Adoption of the standards related to revenue recognition and leases impacted our previously reported results as follows: Adoption of the standards related to revenue recognition and leases had no impact to cash from or used in operating, financing, or investing on our consolidated cash flows statements.

63 Exhibit I Post-adoption Disclosure (Cont d) 62 Revenue Recognition Revenue is recognized upon transfer of control of promised products or services to customers in an amount that reflects the consideration we expect to receive in exchange for those products or services. We enter into contracts that can include various combinations of products and services, which are generally capable of being distinct and accounted for as separate performance obligations. Revenue is recognized net of allowances for returns and any taxes collected from customers, which are subsequently remitted to governmental authorities. Nature of Products and Services Licenses for on-premises software provide the customer with a right to use the software as it exists when made available to the customer. Customers may purchase perpetual licenses or subscribe to licenses, which provide customers with the same functionality and differ mainly in the duration over which the customer benefits from the software. Revenue from distinct on-premises licenses is recognized upfront at the point in time when the software is made available to the customer. In cases where we allocate revenue to software updates, primarily because the updates are provided at no additional charge, revenue is recognized as the updates are provided, which is generally ratably over the estimated life of the related device or license. Certain volume licensing programs, including Enterprise Agreements, include on-premises licenses combined with Software Assurance ( SA ). SA conveys rights to new software and upgrades released over the contract period and provides support, tools, and training to help customers deploy and use products more efficiently. On-premises licenses are considered distinct performance obligations when sold with SA. Revenue allocated to SA is generally recognized ratably over the contract period as customers simultaneously consume and receive benefits, given that SA comprises distinct performance obligations that are satisfied over time

64 Exhibit I Post-adoption Disclosure (Cont d) 63 Cloud services, which allow customers to use hosted software over the contract period without taking possession of the software, are provided on either a subscription or consumption basis. Revenue related to cloud services provided on a subscription basis is recognized ratably over the contract period. Revenue related to cloud services provided on a consumption basis, such as the amount of storage used in a period, is recognized based on the customer utilization of such resources. When cloud services require a significant level of integration and interdependency with software and the individual components are not considered distinct, all revenue is recognized over the period in which the cloud services are provided. Revenue from search advertising is recognized when the advertisement appears in the search results or when the action necessary to earn the revenue has been completed. Revenue from consulting services is recognized as services are provided. Our hardware is generally highly dependent on, and interrelated with, the underlying operating system and cannot function without the operating system. In these cases, the hardware and software license are accounted for as a single performance obligation and revenue is recognized at the point in time when ownership is transferred to resellers or directly to end customers through retail stores and online marketplaces.

65 Exhibit I Post-adoption Disclosure (Cont d) 64 Significant Judgements Our contracts with customers often include promises to transfer multiple products and services to a customer. Determining whether products and services are considered distinct performance obligations that should be accounted for separately versus together may require significant judgment. Certain cloud services, such as Office 365, depend on a significant level of integration and interdependency between the desktop applications and cloud services. Judgment is required to determine whether the software license is considered distinct and accounted for separately, or not distinct and accounted for together with the cloud service and recognized over time. Judgment is required to determine the SSP for each distinct performance obligation. We use a single amount to estimate SSP for items that are not sold separately, including on-premises licenses sold with SA or software updates provided at no additional charge. We use a range of amounts to estimate SSP when we sell each of the products and services separately and need to determine whether there is a discount that needs to be allocated based on the relative SSP of the various products and services. In instances where SSP is not directly observable, such as when we do not sell the product or service separately, we determine the SSP using information that may include market conditions and other observable inputs. We typically have more than one SSP for individual products and services due to the stratification of those products and services by customers and circumstances. In these instances, we may use information such as the size of the customer and geographic region in determining the SSP. Due to the various benefits from and the nature of our SA program, judgment is required to assess the pattern of delivery, including the exercise pattern of certain benefits across our portfolio of customers.

66 Exhibit I Post-adoption Disclosure (Cont d) 65 Significant Judgements Our products are generally sold with a right of return and we may provide other credits or incentives, which are accounted for as variable consideration when estimating the amount of revenue to recognize. Returns and credits are estimated at contract inception and updated at the end of each reporting period as additional information becomes available and only to the extent that it is probable that a significant reversal of any incremental revenue will not occur. Contract Balances Timing of revenue recognition may differ from the timing of invoicing to customers. We record a receivable when revenue is recognized prior to invoicing, or unearned revenue when revenue is recognized subsequent to invoicing. For multi-year agreements, we generally invoice customers annually at the beginning of each annual coverage period. We record a receivable related to revenue recognized for multi-year on-premises licenses as we have an unconditional right to invoice and receive payment in the future related to those licenses. The opening balance of current and long-term accounts receivable, net of allowance for doubtful accounts, was $22.3 billion as of July 1, As of September 30, 2017 and June 30, 2017, long-term accounts receivable, net of allowance for doubtful accounts, were $1.6 billion and $1.7 billion, respectively, and are included in other long-term assets on our consolidated balance sheets. The allowance for doubtful accounts reflects our best estimate of probable losses inherent in the accounts receivable balance. We determine the allowance based on known troubled accounts, historical experience, and other currently available evidence.

67 Exhibit I Post-adoption Disclosure (Cont d) 66 Activity in the allowance for doubtful accounts was as follows: Unearned revenue is comprised mainly of unearned revenue related to volume licensing programs, which may include SA and cloud services. Unearned revenue is generally invoiced annually at the beginning of each contract period for multi-year agreements and recognized ratably over the coverage period. Unearned revenue also includes payments for: consulting services to be performed in the future; Office 365 subscriptions; LinkedIn subscriptions; Xbox Live subscriptions; Windows 10 post-delivery support; Dynamics business solutions; Skype prepaid credits and subscriptions; and other offerings for which we have been paid in advance and earn the revenue when we transfer control of the product or service. Payment terms and conditions vary by contract type, although terms generally include a requirement of payment within 30 to 60 days. In instances where the timing of revenue recognition differs from the timing of invoicing, we have determined our contracts generally do not include a significant financing component. The primary purpose of our invoicing terms is to provide customers with simplified and predictable ways of purchasing our products and services, not to receive financing from our customers, such as invoicing at the beginning of a subscription term with revenue recognized ratably over the contract period, or to provide customers with financing, such as multi-year on-premises licenses that are invoiced annually with revenue recognized upfront.

68 Exhibit I Post-adoption Disclosure (Cont d) 67 Assets Recognized from the Costs to Obtain a Contract with a Customer We recognize an asset for the incremental costs of obtaining a contract with a customer if we expect the benefit of those costs to be longer than one year. We have determined that certain sales incentive programs meet the requirements to be capitalized. Total capitalized costs to obtain a contract were immaterial during the periods presented and are included in other current and long-term assets on our consolidated balance sheets. We apply a practical expedient to expense costs as incurred for costs to obtain a contract when the amortization period would have been one year or less. These costs include our internal sales force compensation program and certain partner sales incentive programs as we have determined annual compensation is commensurate with annual sales activities. Unearned Revenue Unearned revenue by segment was as follows:

69 Exhibit I Post-adoption Disclosure (Cont d) 68 The opening balance of unearned revenue was $22.2 billion as of July 1, Changes in unearned revenue were as follows: Revenue allocated to remaining performance obligations represent contracted revenue that has not yet been recognized ( contracted not recognized ), which includes unearned revenue and amounts that will be invoiced and recognized as revenue in future periods. Contracted not recognized revenue was $59 billion as of September 30, 2017, of which we expect to recognize approximately 60% of the revenue over the next 12 months and the remainder thereafter. [Emphasis added]

70 69 Exhibit II Common Impact Areas and Illustrative Pre-adoption Disclosures

71 Exhibit II AA All industries Impact areas disclosed across multiple industries Control Sell-through recognition model will not be applicable anymore in certain instances. 70 Variable Consideration Contracts that are currently precluded from revenue recognition (e.g. penalties, acceptance provisions, etc.) because of the existing requirement for amounts to be fixed or determinable will be accounted for as variable consideration under Topic 606. Companies will estimate the variable consideration and might recognize some revenue earlier provided such terms are sufficient to estimate the ultimate price expected to be realized. Contingent Revenue Rule Topic 605 restricts the allocation of revenue that is contingent on future deliverables to current deliverables; however, Topic 606 removes this restriction. Contract Acquisition Costs Topic 606 requires the deferral and amortization of incremental costs incurred to obtain a contract (e.g. sales commissions) where the associated contract duration is greater than one year. Under current U.S. GAAP, such costs are often expensed as incurred. Disclosure Topic 606 requires substantially more robust disclosures compared to Topic 605.

72 Exhibit II A Technology 71 Industry-specific Impact Areas Disclosed: i. The requirement to have vendor specific objective evidence (VSOE) for undelivered elements is eliminated. As such, revenue for certain functional software license will be recognized at a point in time compared to the current practice of recognizing the entire sales price ratably over time due to the lack of VSOE. ii. iii. iv. The timing of recognition of certain term license early renewals will be deferred until the commencement of the renewal term rather than recognized upon execution of the renewal agreement. Revenue and cost related to certain set up and implementation will be deferred and recognized over the estimated contract period or useful life of the asset if those activities do not transfer a service or are not distinct in the context of the contracts. Currently, when those activities have standalone value and the related fees are not contingent on the delivery of future goods or services, they are often recognized as performed. Currently, sales-based or usage-based royalties are often recognized as revenues in the period in which such royalties are reported by licensees, which is after the conclusion of the quarter in which the licensees sales or usages occurs. Under the new guidance, companies will be required to estimate and recognize royalties in the period in which the associated sales or usages occur. Illustrative Disclosure Examples: Company/Link Adoption Method Disclosure of Quantitative Impact ServiceNow Full High-level quantified for certain affected areas Electronic Arts Modified No quantified impact was disclosed IBM Modified No quantified impact was disclosed Cisco Modified No quantified impact was disclosed

73 Exhibit II A Technology (Cont d) 72 Back to industry main page This new standard is effective for our interim and annual periods beginning January 1, 2018 We currently anticipate adopting the standard using the full retrospective method to restate each prior reporting period presented. We do not expect the Topic 606 standard to have a material impact on the timing of revenue recognition related to our cloud-based subscription offerings. However, we expect this new standard to have a material impact on the timing of revenue and expense recognition for our contracts related to on-premises offerings, in which we grant customers the right to deploy our subscription service on the customer s own servers, without significant penalty. Under this new standard, the requirement to have vendor specific objective evidence (VSOE) for undelivered elements is eliminated. As such, we may be required to recognize as revenue a portion of the sales price upon delivery of the software, compared to the current practice of recognizing the entire sales price ratably over an estimated subscription period due to the lack of VSOE. To the extent the amounts recognized as revenue have not been billed, the accrued revenue will be recorded as unbilled receivables on our condensed consolidated balance sheets. We currently believe that our total revenues reported for the year ended December 31, 2016 would have increased by approximately $10 to $15 million on a pro forma basis if the new standard had been applied for the entire 2016 fiscal year starting on January 1, 2016.

74 Exhibit II A Technology (Cont d) 73 Back to industry main page In addition, we expect the Topic 606 standard to change the way we account for commissions paid on both our onpremises offerings and our cloud-based subscription offerings. Our current practice is to defer only direct and incremental commission costs to obtain a contract and amortize those costs over the contract term for both our onpremises offerings and our cloud-based subscription offerings. Under this new standard, we will defer all incremental commission costs to obtain customer contracts, including indirect costs that are not tied to a specific contract, for both our on-premises offerings and our cloud-based subscription offerings. Commissions allocated to the software element of our on-premises offerings, which are delivered up front, will be expensed immediately under this new standard, while commissions allocated to the support element of our on-premises offerings as well as commissions paid on our cloudbased subscription offerings, which are delivered over time, will be amortized over an expected period of benefit, which we have determined to be approximately five years. As a result, we currently expect the deferred commissions asset to increase and the related amortization expense in each reporting period to decrease under this new standard. The aggregate impact resulting from changes in the way we account for commission expense for both our cloud-based subscription offerings and our on-premises offerings would have reduced our sales and marketing expenses by approximately $20 to $25 million on a pro forma basis for the year ended December 31, 2016 if the new standard had been applied for the entire 2016 fiscal year starting on January 1, We are continuing to evaluate the impact of the adoption of this standard on our condensed consolidated financial statements, including the increased disclosure requirements on our footnotes, and our preliminary assessments are subject to change. [Emphasis added]

75 Exhibit II A Technology (Cont d) 74 Back to industry main page We anticipate adopting the New Revenue Standard on April 1, 2018 using the modified retrospective method. The New Revenue Standard will have a significant impact on our Condensed Consolidated Financial Statements and related disclosures as it relates to the accounting for substantially all of our transactions with multiple elements or bundled arrangements. For example, for sales of online-enabled games, as currently reported we do not have vendor-specific objective evidence of fair value ( VSOE ) for unspecified future updates, and thus, revenue from the entire sales price is recognized ratably over the estimated offering period. However, under the New Revenue Standard, the VSOE requirement for undelivered elements is eliminated, allowing us to essentially break-apart our online-enabled games and account for the various promised goods or services identified as separate performance obligations. For example, for the sale of an online-enabled game, we usually have multiple distinct performance obligations such as software, future update rights, and an online service. The software performance obligation represents the initial game delivered digitally or via physical disc. The future update rights performance obligation may include software patches or updates, maintenance, and/or additional free content to be delivered in the future. And lastly, the online service performance obligation consists of providing the customer with a service of online activities (e.g., online playability). Under current software revenue recognition rules, we recognize as revenue the entire sales price over the estimated offering period. However, under the New Revenue Standard, we will recognize a portion of the sales price as revenue upon delivery of the software performance obligation with the future update rights and online services portions recognized ratably over the estimated offering period. We currently estimate that a significant portion of the sales price will be allocated to the software performance obligation and recognized upon delivery, and the remaining will be allocated to the future update rights and the online service performance obligations and recognized ratably over the estimated offering period. As a result, we expect a significant portion of our annual revenue, and thereby annual profit, will shift from the first and fourth fiscal quarters to the second and third fiscal quarters which is historically when a significant portion of our annual bookings and software deliveries have been made.

76 Exhibit II A Technology (Cont d) 75 Back to industry main page In addition, both portions of sales price allocated to future update rights and online services will be classified as service revenue under the New Revenue Standard (currently, only future update rights are generally presented as product revenue). Therefore, upon adoption, an increased portion of our sales from online-enabled games will be presented as service revenue than is currently reported today. Also, upon adoption of the New Revenue Standard, we will present our sales returns and price protection reserves as liabilities (currently, sales returns and price protection reserves are classified as contra-assets within receivables on our Condensed Consolidated Balance Sheets). [Emphasis added]

77 Exhibit II A Technology (Cont d) 76 Back to industry main page... The company will adopt the guidance on January 1, 2018 and apply the cumulative catch-up transition method. Given the scope of work required to implement the recognition and disclosure requirements under the new standard, the company began its assessment process in 2014 and has since made significant progress, including identification of changes to policy, processes, systems and controls. This also includes the assessment of data availability and presentation necessary to meet the additional disclosure requirements of the guidance in the Notes to the Consolidated Financial Statements. The company expects revenue recognition for its broad portfolio of hardware, software and services offerings to remain largely unchanged. However, the guidance is expected to change the timing of revenue recognition in certain areas, including accounting for certain software licenses. These impacts are not expected to be material. The company expects to continue to recognize revenue for term license (recurring license charge) software arrangements on a monthly basis over the period that the client is entitled to use the license due to the contractual terms in these arrangements. Since the company currently expenses sales commissions as incurred, the requirement in the new standard to capitalize certain in-scope sales commissions is being evaluated to determine its potential impact in the consolidated financial statements in the year of adoption. There will be no impact to cash flows. The company continues to assess all potential impacts of the guidance and given normal ongoing business dynamics, preliminary conclusions are subject to change. [Emphasis added]

78 Exhibit II A Technology (Cont d) 77 Back to industry main page... Cisco will adopt the new standard using the modified retrospective method at the beginning of its first quarter of fiscal Cisco is on schedule in establishing new accounting policies, implementing systems and processes (including more extensive use of estimates), and internal controls necessary to support the requirements of the new standard. Cisco has completed its preliminary assessment of the financial statement impact of the new standard, as discussed below, and will continue to update that assessment as more information becomes available. The new standard will primarily impact Cisco s revenue recognition for software arrangements and sales to two-tier distributors. In both areas, the new standard will accelerate the recognition of revenue. The table below details both the current and expected revenue recognition timing in these areas:

79 Exhibit II A Technology (Cont d) 78 Back to industry main page Cisco expects that the new standard will not have a material impact on total revenue in the year of adoption based on two factors: i) revenue will be accelerated consistent with the changes in timing as indicated in the preceding table, largely offset by ii) the reduction of revenue from software arrangements where revenue was previously deferred in prior periods and recognized ratably over time as required under the current standard. This preliminary assessment is based on the types and number of revenue arrangements currently in place. The exact impact of the new standard will be dependent on facts and circumstances at adoption and could vary from quarter to quarter. In addition to the above revenue recognition timing impacts, the new standard will require incremental contract acquisition costs (such as sales commissions) for customer contracts to be capitalized and amortized over the contract period. Currently, these costs are expensed as incurred. Cisco will be required to record cumulative effect adjustments to retained earnings upon adopting the new standard at the beginning of fiscal The most significant of these adjustments will be to reduce product deferred revenue and increase retained earnings at the date of adoption to reflect revenue that would have been already recognized under the new standard related to existing arrangements. There will also be an adjustment to increase accounts receivable and reduce inventories related to the changes in revenue recognition on sales to two-tier distributors. Lastly, an adjustment will be recorded to establish an asset and increase retained earnings related to the requirement to capitalize incremental contract acquisition costs for customer contracts. [Emphasis added]

80 Exhibit II B Industrial products, chemicals, and manufacturing 79 Industry-specific Impact Areas Disclosed: i. For certain contracts that are recognized based on percentage-of-completion units-of-delivery or attainment of milestones, the adoption might result in change of revenue timing depending on when the control is transferred to customers. ii. iii. Guaranteed reimbursements of certain pre-production engineering, development and tooling costs related to products manufactured for customers under long-term supply agreements are currently recorded as cost offsets by some companies; whereas under the new standard such guaranteed recoveries may be recognized as revenues, as the reimbursements specified in the customer contracts may represent consideration from contracts with customers under the new standard. There continues to be on-going dialogue between industry groups and standard setters regarding the treatment of these reimbursements under the new standard. Timing of revenue recognition for large manufacturing items might be earlier than current practice as the transfer of control generally occurs earlier than that of risk of loss to customers. Illustrative Disclosure Examples: Company/Link Adoption Method Disclosure of Quantitative Impact GE Full Quantified impact analysis on retained earning adjustment and EPS Lockheed Martin Full Quantified impact was disclosed in MD&A Honeywell Modified No quantified impact was disclosed

81 Exhibit II B Industrial products, chemicals, and manufacturing (Cont d) 80 Back to industry main page TRANSITION METHOD FOR APPLYING THE NEW STANDARD Companies can use either a full retrospective or modified retrospective method to adopt the standard. Under the full retrospective method, all periods presented will be updated upon adoption to conform to the new standard and a cumulative adjustment for effects on periods prior to 2016 will be recorded to retained earnings as of January 1, Under the modified retrospective approach, prior periods are not updated to be presented on an accounting basis that is consistent with Rather, a cumulative adjustment for effects of applying the new standard to periods prior to 2018 is recorded to retained earnings as of January 1, Because only 2018 revenues reflect application of the new standard, incremental disclosures are required to present the 2018 revenues under the prior standard. As noted above, we have elected to apply the full retrospective approach. We chose that approach because we believe that it is the most helpful to our investors. First and foremost, when we adopt the standard in 2018 we will provide investors with a consistent view of historical trends, as 2016 and 2017 will be on a basis consistent with CHANGE IN TIMING AND PRESENTATION, NO IMPACT TO CASH OR ECONOMICS The new standard requires companies to identify contractual performance obligations and determine whether revenue should be recognized at a point in time or over time based on when control of goods and services transfer to a customer. As a result, we expect significant changes in the presentation of our financial statements, including: (1) timing of revenue recognition, and (2) changes in classification between revenue and costs. The new standard will have no cash impact and, as such, does not affect the economics of our underlying customer contracts. The effect of applying the new guidance to our existing book of contracts will result in lower reported earnings in 2018 (and comparative periods previously reported) and in the early years after adoption. However, we expect to experience an increase in reported earnings, on that existing book of contracts, as they mature. The new standard will provide for a better alignment of cash and earnings for the affected long-term customer contracts and we expect that it will enhance comparability across industry peers.

82 Exhibit II B Industrial products, chemicals, and manufacturing (Cont d) 81 Back to industry main page SPECIFIC EFFECT ON GE BUSINESSES Power and Aviation Service Agreements - For our long-term product service agreements, primarily in our Power and Aviation businesses, we expect to continue to recognize revenue based on costs incurred plus an estimated margin rate (over time model). However, the new standard provides prescriptive guidance tied to several factors for determining what constitutes the proper scope of a customer contract for accounting purposes. These factors include optional purchases, contract modifications, and termination clauses. For example, under the new standard contract modifications will be accounted for prospectively by recognizing the financial effect of the modification over the remaining life of the contract. Under existing accounting guidance revisions to estimated margin rates resulting from modifications were reflected as cumulative effect adjustments to earnings in the current period. Aviation Commercial Engines - Consistent with industry peers, the financial presentation of our Aviation Commercial engines business will be significantly affected as they will be accounted for as of a point in time, which is a change from our current long-term contract accounting process. Our current process applies contract-specific estimated margin rates, which include the effect of estimated cost improvements, to costs incurred. This change is required because our commercial engine contracts do not transfer control to the customer during the manufacturing process. Each install and spare engine will be accounted for as a separate performance obligation, reflecting the actual price and manufacturing costs of such engines. We expect that the most significant effect of this change will be reflected when we have new engine launches, where the cost of earlier production units is higher than the cost of later production units because of cost improvements. All Other Large Equipment - For the remainder of our equipment businesses, the new revenue standard requires emphasis on transfer of control rather than risks and rewards, which may accelerate timing of revenue recognition versus our current practices. For example, in our Renewable Energy business we wait for risk of loss to be assumed by the customer before recognizing revenue, which generally occurs later than when control is transferred.

83 Exhibit II B Industrial products, chemicals, and manufacturing (Cont d) 82 Back to industry main page CURRENT RANGE OF FINANCIAL STATEMENT EFFECT We will adopt the new standard as of January 1, When we report our 2018 results, the comparative results for 2017 and 2016 will be updated to reflect the application of the requirements of the new standard to these periods. Based on our assessment and best estimates to date, we expect a non-cash charge to our January 1, 2016 retained earnings balance of approximately $4.3 billion. We estimate that the charge will comprise approximately $1.0 billion related to commercial aircraft engines and $3.3 billion related primarily to our services businesses (predominately in Power and Aviation). Beyond those effects, we expect application of the new guidance will result in increases and decreases in revenue within our segments, which will largely offset overall and will be immaterial at a total company level. We estimate that our 2016 restated earnings per share will be lower by approximately $0.13, driven primarily by the required changes in accounting for long-term product service arrangements as described above. The expected effect to 2016 earnings per share reflects an increase from the previously reported estimate of approximately $0.10 due to further refinements in the application of our technical interpretations and our detailed assessments at a contract level, which is a complex process for our long-term contracts. In addition, the impact on 2017 will also be a decrease to earnings; however, we are unable to complete that calculation until we finalize our 2017 results. Upon adoption in 2018, our books and records will only reflect the results as required under the new standard limiting our ability to estimate the effect of the standard on our earnings. Given the inherent difficulty in this ongoing estimation of the effect of the standard on any future periods, we do not plan to continue to assess the effect on To summarize, we will adopt the new standard in 2018, at which time we will update prior periods to be presented on a consistent basis. As discussed above, we anticipate a dilutive effect of the new standard in the year of adoption consistent with the effect to the restated 2016 and 2017 results and the effect will be less dilutive for years after initial adoption. However, this expectation is based on many variables, including underlying business performance, which are subject to change, making the effect of the standard on future periods difficult to estimate. Importantly, application of the new guidance has no effect on the cash we expect to receive nor the economics of these contracts. Rather, it will simply more closely align revenue with cash, which we believe will be helpful to our investors. [Emphasis added]

84 Exhibit II B Industrial products, chemicals, and manufacturing (Cont d) 83 Back to industry main page We will adopt the requirements of the new standard on the effective date of January 1, 2018 using the full retrospective transition method We commenced our evaluation of the impact of ASC 606 in late 2014, by evaluating its impact on selected contracts at each of our business segments. With this baseline understanding, we developed a project plan to evaluate thousands of contracts across our business segments, develop processes and tools to dual report financial results under both current GAAP and ASC 606 and assess the internal control structure in order to adopt ASC 606 on January 1, We have periodically briefed our Audit Committee on our progress made towards adoption. We currently recognize the majority of our revenue using the percentage-of-completion method of accounting, whereby revenue is recognized as we progress on the contract. For contracts with a significant amount of development and/or requiring the delivery of a minimal number of units, revenue and profit are recognized using the percentage-of-completion cost-to-cost method to measure progress. For example, we use this method at our Aeronautics business segment for the F-35 program; at our MFC business segment for the THAAD program; at our RMS business segment for the Littoral Combat Ship and Aegis Combat System programs; and at our Space Systems business segment for government satellite programs. For contracts that require us to produce a substantial number of similar items without a significant level of development, we currently record revenue and profit using the percentage-of-completion units-of-delivery method as the basis for measuring progress on the contract. For example, we use this method in Aeronautics for the C-130J and C-5 programs; in MFC for tactical missile programs (e.g., Hellfire, JASSM), PAC-3 programs and fire control programs (e.g., LANTIRN, Sniper ); in RMS for Black Hawk and Seahawk helicopter programs; and in Space Systems for commercial satellite programs. For contracts to provide services to the U.S. Government, revenue is generally recorded using the percentage-of-completion cost-to-cost method.

85 Exhibit II B Industrial products, chemicals, and manufacturing (Cont d) 84 Under ASC 606, revenue will be recognized as the customer obtains control of the goods and services promised in the contract (i.e., performance obligations). Given the nature of our products and terms and conditions in our contracts, in particular those with the U.S. Government (including foreign military sales (FMS) contracts), the customer obtains control as we perform work under the contract. Therefore, we expect to recognize revenue over time for substantially all of our contracts using a method similar to our current percentage-of-completion cost-to-cost method. Accordingly, adoption of ASC 606 will primarily impact our contracts where revenue is currently recognized using the percentage-of-completion units-of-delivery method. As a result, we anticipate recognizing revenue for these contracts earlier in the performance period as we incur costs, as opposed to when units are delivered. We may also have more performance obligations in our contracts under ASC 606, which may impact the timing of recording sales and operating profit, including those where sales recognition is deferred pending the incurrence of costs. Backlog will also be impacted upon our adoption to reflect these changes and the requirements of ASC 606. During the third quarter of 2017, we completed our preliminary assessment of the cumulative effect of adopting ASC 606 on our December 31, 2015 balance sheet using the full retrospective transition method. The adoption resulted in a decrease in inventories, an increase in billed receivables, contract assets (i.e., unbilled receivables) and contract liabilities (i.e., customer advances and amounts in excess of costs incurred) to primarily reflect the impact of converting contracts currently applying the units-of-delivery method to the cost-to-cost method for recognizing revenue and profits. We expect the net impact of these reclassifications to increase both our current assets and current liabilities by approximately 2%. In addition, we completed our preliminary assessment of adopting ASC 606 on our fiscal year 2016 operating results during the third quarter of We expect the adoption of ASC 606 to increase our 2016 net sales by approximately less than 1% and decrease our operating profit and net earnings from continuing operations each by approximately less than 2%. The impact of adopting ASC 606 on our 2016 operating results may not be indicative of the adoption impacts in future periods or of our operating performance. We will continue our evaluation of ASC 606, including any new interpretations, through the date of adoption. Back to industry main page

86 Exhibit II B Industrial products, chemicals, and manufacturing (Cont d) 85 Back to industry main page Discussion in MD&A Effective January 1, 2018, we will adopt Accounting Standards Update (ASU) No , Revenue from Contracts with Customers, as amended (commonly referred to as ASC 606), which will change the way we recognize revenue for certain customer contracts. During the third quarter of 2017, we completed a preliminary assessment of the impacts of adopting ASC 606 on our 2017 financial outlook. The following table presents our updated 2017 outlook under the current revenue recognition accounting standard (ASC 605) and our preliminary estimate under ASC 606. We are providing this information to assist in understanding our 2018 trend information in the following paragraphs. Additional information regarding the impacts of adopting ASC 606 can be found in "Note 10 - Other" included in our Notes to Consolidated Financial Statements (under the caption "Recent Accounting Pronouncements").

87 Exhibit II B Industrial products, chemicals, and manufacturing (Cont d) 86 Back to industry main page We expect our 2018 net sales to increase by approximately 2% as compared to 2017 net sales adjusted for the adoption of ASC 606 presented in the preceding table. Total business segment operating margin in 2018 is expected to be in the 10.3% to 10.5% range and cash from operations is expected to be greater than or equal to $5.0 billion. The preliminary outlook for 2018 assumes the U.S. Government continues to support and fund our key programs beyond the continuing resolution for government fiscal year (GFY) Changes in circumstances may require us to revise our assumptions, which could materially change our current estimate of 2018 net sales, operating margin and cash flows. [Emphasis added]

88 Exhibit II B Industrial products, chemicals, and manufacturing (Cont d) 87 Back to industry main page We will adopt the requirements of the new standard effective January 1, 2018 and expect to use the modified retrospective transition method with the cumulative effect to the opening balance of retained earnings recognized as of the date of initial adoption. We believe we are following an appropriate timeline to allow for proper recognition, presentation and disclosure upon adoption, including the related impacts to internal controls. The Company s evaluation of the new standard is substantially complete and the Company has prepared an initial assessment of the impacts of adoption on its Consolidated Financial Statements and disclosures. The FASB has issued, and may issue in the future, interpretive guidance which may cause our evaluation to change. We will continue to evaluate the adoption impact of the new standard, including as it relates to new contracts that will be recognized following adoption. Based on the evaluation of our current contracts and revenue streams, recognition will be mostly consistent under both the current and new standard. However, we expect the guidance in certain areas, particularly in our Aerospace segment, to impact our current revenue recognition policies. The current accounting policy for costs incurred for nonrecurring engineering and development activities of our Aerospace products under agreements with commercial customers is generally to record the expense as incurred. Any customer funding received for such efforts is recognized when earned as a reduction of cost of sales. Following adoption of the new standard, the customer funding will generally be classified as revenue and not as a reduction of cost of sales. Such revenue will be deferred and subsequently recognized as products are delivered to the customers. Additionally, under the new guidance, expenses incurred, up to the customer agreed funded amount, will be deferred as an asset and subsequently recognized as cost of sales also when products are delivered to the customer. Hence, the new guidance will result in an increase in deferred costs (asset) and deferred revenue (liability) on our Consolidated Balance Sheet, however, we expect this to result in no net impact to income before taxes.

89 Exhibit II B Industrial products, chemicals, and manufacturing (Cont d) 88 Back to industry main page In In addition, we expect revenues for our mechanical service programs at our Aerospace business to be impacted. Our current policy is to recognize revenue over time as costs are incurred (input method). Following adoption, we will continue to recognize revenue over time, but recognition will reflect a series of distinct services using the output method. This change will result in certain unbilled receivables or deferred revenue being eliminated through retained earnings, but we do not expect a material impact. We do not currently expect the new standard to have a material impact on our consolidated financial position or results of operations. We expect the new standard will have no cash impact and, as such, does not affect the economics of our underlying customer contracts. The disclosures in our notes to Consolidated Financial Statements related to revenue recognition will be significantly expanded under the new standard, specifically around the quantitative and qualitative information about performance obligations, changes in contract assets and liabilities, and disaggregation of revenue. [Emphasis added]

90 Exhibit II C Transportation and utilities 89 Industry-specific Impact Areas Disclosed: i. The incremental cost approach used by airline companies for miles earned through travel will be eliminated. ii. iii. Certain airline ancillary fees directly related to passenger revenue tickets, such as airline change fees and baggage fees, are likely no longer considered distinct performance obligations separate from the passenger travel component. As a result, such fees which were previously recognized when received will likely be recognized when transportation is provided. Many utility companies disclosed that they do not expect a significant change in revenue practices. Additionally, certain industry-specific implementation issues have been substantially resolved through AICPA Task Force, including the collectability of utility tariff sale contracts and the accounting for bundled sales contracts. Specifically, Some utility companies expect that tariff sale contracts, including those with lower credit quality customers, are generally deemed to be probable of collection under the guidance and, thus, the timing of revenue recognition will continue to be based on the electricity or natural gas supplied in the period, consistent with current practice. Revenues recognized from bundled sales contracts are generally expected to be recognized based on the invoice price, consistent with current practice; and Contributions in aid of construction are expected to be outside of the scope of the standard and, therefore, will continue to be accounted for as a reduction to Property, Plant, and Equipment. Illustrative Disclosure Examples: Company Adoption Method Disclosure of Quantitative Impact GOL Full No quantified impact was disclosed American Airlines Full High-level quantified impact was disclosed in MD&A Exelon Full No quantified impact was disclosed

91 Exhibit II C (Cont d) Transportation and utilities 90 Back to industry main page. The Company expects to adopt the new standard on the date it becomes effective using the full retrospective method. In 2016, the Company carried out a preliminary assessment of IFRS 15, which is subject to changes due to more detailed analyses that are still in progress. Among the main challenges for the adoption of IFRS 15, the Company believes that the recognition of the following revenues may change compared with the current format: a) Passenger revenue arising from codeshare agreements: corresponds to agreements where two or more airlines get into an agreement to provide air transportation services. In situations when the Company will work as the principal, revenue will be recognized based on the gross value of the transaction (price of the ticket to the final customer), rather than on the portion that corresponds only to the service provided by the Company. b) Ancillary revenue: comprises all revenue related to air transportation services, such as excess baggage, cancelation fees, refunds, among others. These revenues must be assessed and classified as distinct or related to the main service, and are recognized only when the air transportation service incurred. In this regard, the Company does not expect significant changes, since these revenues are already recognized based on this criteria, at the moment of recognition of passenger transportation revenue. In this regard, the Company is performing its assessment and does not expect significant changes. c) Breakage revenue: comprises the expectation of mileage and tickets that are not likely to be used by the customer. To recognize these revenues, the Company uses analysis tools and statistical data that allow the estimate to be calculated with a reasonable level of certainty. Given the standard s specific requirements regarding this, the Company does not believe that the implementation of IFRS 15 will cause material impacts. Additionally, the Company will continue assessing the impacts from the adoption of the new standard and will disclose additional information as the analyses are concluded. [Emphasis added]

92 Exhibit II C (Cont d) Transportation and utilities 91 Back to industry main page We will adopt the new revenue standard effective January 1, Entities have the choice to apply the new revenue standard either retrospectively to each reporting period presented or by recognizing the cumulative effect of applying the new revenue standard at the date of initial application and not adjusting comparative information. We currently expect to adopt the new revenue standard using the full retrospective method. We are in the process of finalizing how the application of the new revenue standard will impact our condensed consolidated financial statements. We currently expect that the new revenue standard will materially impact our liability for outstanding mileage credits earned by AAdvantage loyalty program members. We currently use the incremental cost method to account for this portion of our loyalty program liability, which values these mileage credits based on the estimated incremental cost of carrying one additional passenger. The new revenue standard will require us to change our policy and apply a relative selling price approach whereby a portion of each passenger ticket sale attributable to mileage credits earned will be deferred and recognized in passenger revenue upon future mileage redemption. The carrying value of the earned mileage credits recognized in loyalty program liability is expected to be materially greater under the relative selling price approach than the value attributed to these mileage credits under the incremental cost method. The new revenue standard will also require us to reclassify certain ancillary fees to passenger revenue, which are currently included within other operating revenue. Discussion in MD&A We currently estimate that upon adoption of the new revenue standard as of January 1, 2018, our liability for outstanding mileage credits will increase by approximately $5.5 billion, offset in part by a $2.0 billion increase in our deferred tax asset, resulting in a net $3.5 billion charge to retained earnings. Additionally, after applying the new revenue standard, our 2017 passenger revenue and pre-tax income is currently estimated to increase by approximately $300 million. Finally, approximately $2.5 billion annually of ancillary revenues presently included within other revenue will be reclassified to passenger revenue. This reclassification will have no impact on total operating revenues. The foregoing estimates are subject to change. [Emphasis added]

93 Exhibit II C (Cont d) Transportation and utilities 92 Back to industry main page The Registrants have assessed the revenue recognition standard and are executing a detailed implementation plan in preparation for adoption on January 1, The Registrants have also actively participated in the AICPA Power and Utilities Industry Task Force (Industry Task Force) process to identify implementation issues and support the development of related implementation guidance. In coordination with the Industry Task Force, the Registrants have reached conclusions on the following key accounting issues: The Utility Registrants tariff sale contracts, including those with lower credit quality customers, are generally deemed to be probable of collection under the guidance and, thus, the timing of revenue recognition will continue to be concurrent with the delivery of electricity or natural gas, consistent with current practice; Consistent with current industry practice, revenues recognized from sales of bundled energy commodities (i.e., contracts involving the delivery of multiple energy commodities such as electricity, capacity, ancillary services, etc.) are generally expected to be recognized upon delivery to the customer in an amount based on the invoice price given that it corresponds directly with the value of the commodities transferred to the customer; and Contributions in aid of construction are outside of the scope of the standard and, therefore, will continue to be accounted for as a reduction to Property, Plant, and Equipment. The Registrants have also completed the following key activities in their implementation plan: Evaluated existing contracts and revenue streams for potential changes in revenue recognition under the new guidance. Based on these assessments, the Registrants have identified the following items that will be accounted for differently under the new revenue guidance as compared to current guidance: Costs to acquire certain contracts (e.g., sales commissions associated with retail power contracts) will be deferred and amortized ratably over the term of the contract rather than being expensed as incurred; and Variable consideration within certain contracts (e.g., performance bonuses) will be estimated and recognized as revenue over the term of the contract rather than being recognized when realized.

94 Exhibit II C (Cont d) Transportation and utilities 93 Back to industry main page Notwithstanding these identified changes, Exelon does not expect the new guidance will have a material impact on the amount and timing of revenue recognition; Currently expect to apply the new guidance using the full retrospective method; and Generation expects to disclose disaggregated revenue by operating segment and further differentiation by major products (i.e., electric power and gas) and the Utility Registrants expect to disclose disaggregated revenue by major customer class (i.e., residential and commercial & industrial) separately for electric and gas in the Combined Notes to Consolidated Financial Statements. [Emphasis added]

95 Exhibit II D Life science 94 Industry-specific Impact Areas Disclosed: i. Overall, companies do not believe the adoption of ASC 606 will have a significant impact on revenue generated from product sales. ii. Companies start to disclose their preliminary conclusion as to whether the revenue practices related to collaboration arrangements will change or not. The disclosures mainly include the distinct evaluation of the license and the potential change in practices related to milestone payments. Illustrative Disclosure Examples: Company Adoption Method Disclosure of Quantitative Impact Bristol Myers Squibb Co Modified Quantified impact on revenue was disclosed Incyte Modified No quantified impact was disclosed AbbVie Modified Quantified impact analysis on retained earnings

96 Exhibit II D Life science (Cont d) 95 Back to industry main page Amended guidance for revenue recognition will be adopted in the first quarter of 2018 using the modified retrospective method with the cumulative effect of the change recognized in retained earnings. The new guidance referred to as ASC 606 requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers and replaces most of the existing revenue recognition standards in U.S. GAAP. A five step model will be utilized to achieve the core principle; (1) identify the customer contract, (2) identify the contract s performance obligations, (3) determine the transaction price, (4) allocate the transaction price to the performance obligations and (5) recognize revenue when or as a performance obligation is satisfied. The Company s assessment of the new standard s impact is substantially complete. The timing of recognizing revenue is not expected to change for typical net product sales to customers, most existing alliance arrangements as well as royalties and sale-based milestones from out-licensing arrangements. In addition, the timing of recognizing royalties, sales-based milestones and other forms of contingent consideration resulting from the divestiture of businesses is not expected to change. However, transaction prices are no longer required to be fixed or determinable and certain variable consideration might be recognized prior to the occurrence or resolution of the contingent event to the extent it is probable that a significant reversal in the amount of estimated cumulative revenue will not occur. Certain estimated future royalties and termination fees for licensing rights previously reacquired by alliance partners are expected to be recognized as contract assets upon adoption of the new standard. Refer to the Sanofi and Erbitux* Japan arrangements in "Note 3. Alliances" of the 2016 Form 10-K. As a result of the new guidance and cumulative effect adjustment, revenue and other income is expected to be lower in 2018 by approximately $225 million and $125 million, respectively, compared to what would have been reported under the previous standard. [Emphasis added]

97 Exhibit II D Life science (Cont d) 96 Back to industry main page We have substantially completed an initial impact assessment of the potential changes from adopting ASU The impact assessment consisted of a review of a representative sample of contracts, discussions with key stakeholders, and a cataloging of potential impacts on our financial statements, accounting policies, financial controls, and operations. We currently do not anticipate a material impact on our revenue recognition practices for product and royalty revenues. We do anticipate that the adoption of ASU will have primarily two impacts on our contract revenues generated by our collaborative research and license agreements: (i) Changes in the model for distinct licenses of functional intellectual property which may result in a timing difference of revenue recognition. Whereas revenue from these arrangements was previously recognized over a period of time pursuant to revenue recognition guidance that was in place for our arrangements at the time such arrangements commenced, revenue from these arrangements may now be recognized at point in time under the new guidance. (ii) Assessments of milestone payments, which are linked to events that are in our control, will result in variable consideration that may be recognized at an earlier point in time under the new guidance, when it is probable that the milestone will be achieved without a significant future reversal of cumulative revenue expected. We have not yet completed our final review of the impact of this guidance including the new disclosure requirements, as we are continuing to evaluate the impacts of adoption and the implementation approach to be used. We plan to adopt the new standard effective January 1, 2018 and are considering adopting using the modified retrospective method. We continue to monitor additional changes, modifications, clarifications or interpretations being undertaken by the FASB, which may impact our current conclusions. [Emphasis added]

98 Exhibit II D Life science (Cont d) 97 Back to industry main page. AbbVie will adopt the standard effective the first quarter of 2018 and apply the amendments using the modified retrospective method. The company has made substantial progress in its review of the new standard and will complete its assessment by December 31, AbbVie does not expect significant changes to the amounts or timing of revenue recognition for product sales, which is its primary revenue stream. However, the company expects that the adoption of the new standard will require a cumulative-effect adjustment to retained earnings on January 1, 2018 of approximately $130 million, net of tax, primarily related to certain deferred license revenues that were originally expected to be recognized through early [Emphasis added]

99 Exhibit II E Entertainment, media and communications Industry-specific Impact Areas Disclosed: i. Under the current guidance, revenue for the renewed license term is recognized on the date the renewal is agreed to contractually. Under the new guidance, such revenue will not be recognized until the later of the date the renewal term begins or the licensed content becomes available. ii. iii. iv. Under the current guidance, when a company licenses a completed library of content and agrees to refresh the library with new content as it becomes available, and the licensee is not entitled to a refund if no further library titles are delivered, revenue is recognized once access to the library is granted to the licensee. Under the new guidance, the company will need to estimate the additional content it will deliver in the future and allocate a portion of the transaction price to that content. Certain intellectual property, such as brands, trade names and logos, is categorized in the new guidance as symbolic, which results in over-time revenue recognition. Under the current guidance, when there are no remaining performance obligations, revenue from such licenses of symbolic intellectual property is recognized at the inception of the license term. Due to the elimination of contingent revenue rule, it will no longer be permitted to recognize revenue net of discounts during the promotional periods and not recognize any revenue during free service periods. Instead, revenue recognition will be accelerated for these contracts as the impact of discounts or free service periods that are considered performance obligations will be recognized uniformly over the total contractual period. v. Certain upfront installation or set-up fee that is currently recognized upon completion of the associated services will be deferred and recognized over a period of time as those services do not constitute distinct performance obligations. Illustrative Disclosure Examples: Company Adoption Method Disclosure of Quantitative Impact Dish Network Modified No quantified impact was disclosed Verizon Modified No quantified impact was disclosed T-Mobile Modified Quantified impact related to contract acquisition costs was disclosed 98

100 Exhibit II E Entertainment, media and communications (Cont d) 99 Back to industry main page ASU allows for either a full retrospective or modified retrospective adoption, and we plan on using the modified retrospective method. We are currently finalizing our accounting policies under ASU While we have not determined the ultimate impact of the standard on our Condensed Consolidated Financial Statements and related disclosures, we believe the most significant impact to us is that the standard will require that incremental costs to obtain a customer, which represent a significant portion of our non-advertising subscriber acquisition costs, be deferred and recognized over a period of time, whereas our current policy is to expense these costs as incurred. Note that where the expected amortization period is less than a year, we plan to use the practical expedient which permits expensing of these costs. From a revenue perspective, for substantially all of our residential video customers under a contract, we have concluded that the contract term under ASC is one month. Accordingly, while there will be changes in the way certain upfront fees and other items are recognized, we do not believe at this time there will be a material change to our revenue recognition model for our residential video customers. We are currently in the process of identifying and implementing changes to our systems, processes, and internal controls to meet the requirements of the standard. The ultimate impact of adopting ASU for both revenue recognition and costs to obtain and fulfill contracts will depend on the promotions and offers in place during the period leading up to and after the adoption of ASU [Emphasis added]

101 Exhibit II E Entertainment, media and communications (Cont d) 100 Back to industry main page.. We are in the process of evaluating the impact of the standard update. The ultimate impact on revenue resulting from the application of the new standard will be subject to assessments that are dependent on many variables, including, but not limited to, the terms of our contractual arrangements and our mix of business. Upon adoption, we expect that the allocation of revenue between equipment and service for our wireless fixed-term service plans will result in more revenue allocated to equipment and recognized earlier as compared with current GAAP. We expect the timing of recognition of our sales commission expenses will also be impacted, as a substantial portion of these costs, which are currently expensed, will be capitalized and amortized as described above. In 2016, total sales commission expenses were approximately $4.2 billion. In 2017, we expect total sales commission expenses to decline as our wireless customers continue to migrate from our fixed-term service plans to device payment plans which have lower commission structures. We have established a cross-functional coordinated implementation team to implement the standard update related to the recognition of revenue from contracts with customers. We have identified and are in the process of implementing changes to our systems, processes and internal controls to meet the standard update s reporting and disclosure requirements. [Emphasis added]

102 Exhibit II E Entertainment, media and communications (Cont d) 101 Back to industry main page We are adopting the standard using the modified retrospective method with a cumulative catch up adjustment and providing additional disclosures comparing results to previous GAAP. We currently anticipate this standard will have a material impact on our consolidated financial statements. While we are continuing to assess all potential impacts of the standard, we currently believe the most significant potential impacts include the following items: Whether our EIP contracts contain a significant financing component, which is similar to our current practice of imputing interest, and would similarly impact the amount of revenue recognized at the time of an EIP sale and whether or not a portion of the revenue is recognized as interest and included in other revenues, rather than equipment revenues. We currently expect to recognize the financing component in our EIP contracts, including those financing components that are not considered to be significant to the contract. We believe that this application will be consistent with our current practice of imputing interest. As we currently expense contract acquisition costs, we believe that the requirement to defer incremental contract acquisition costs and recognize them over the term of the initial contract and anticipated renewal contracts to which the costs relate will have a significant impact to our consolidated financial statements. We plan to utilize the practical expedient permitting expensing of costs to obtain a contract when the expected amortization period is one year or less which we expect will typically result in expensing commissions paid to acquire branded prepaid service contracts. Currently, we believe that incremental contract acquisition costs of approximately $450 million to $550 million that were incurred during the nine months ended September 30, 2017, which consists primarily of commissions paid to acquire branded postpaid service contracts, would require capitalization and amortization under the new standard. We expect that deferred contract costs will have an average amortization period of approximately 24 months, subject to being monitored and updated every period to reflect any significant change in assumptions. In addition, the deferred contract cost asset will be assessed for impairment on a periodic basis.

103 Exhibit II E Entertainment, media and communications (Cont d) 102 Back to industry main page We expect that promotional bill credits offered to customers on equipment sales that are paid over time and are contingent on the customer maintaining a service contract will result in extended service contracts, which impacts the allocation and timing of revenue recognition between service revenue and equipment revenue. Overall, with the exception of the aforementioned impacts, we do not expect that the new standard will result in a substantive change to the method of allocation of contract revenues between various services and equipment, nor to the timing of when revenues are recognized for most of our service contracts. We are still in the process of evaluating these impacts, and our initial assessment may change due to changes in the terms and mix of the contractual arrangements we have with customers. New products or offerings, or changes to current offerings may yield significantly different impacts than currently expected. We are in the process of implementing significant new revenue accounting systems, processes and internal controls over revenue recognition which will assist us in the application of the new standard. [Emphasis added]

104 Exhibit II F and other Industry-specific Impact Areas Disclosed: Wholesale, retail, services 103 i. Revenue associated with the unredeemed portion of gift cards will be recognized over the expected redemption period under the new standard rather than waiting until the likelihood of redemption becomes remote or waiting for the gift card to expire. ii. iii. Franchise fees that are currently recognized when a new store opens or at the start of a new franchise term will be recognized over the franchise term if the initial franchise services are not distinct from the continuing rights or services offered during the term of the franchise agreement. Advertising fund contributions from franchisees and the related advertising expenditures are currently reported on a net basis on balance sheets as deferred liability or receivable depending on the relative timing difference between advertising fund contributions received and advertising expenditures spent for the period. Under the new guidance, advertising fund contributions from franchisees and advertising fund expenditures will be reported on a gross basis if the entity acts as a principal to such contributions and expenditures. As a result, the related advertising fund revenues and expenses may be reported in different periods. Illustrative Disclosure Examples: Company Adoption Method Disclosure of Quantitative Impact Yum China Holdings Still assessing No quantified impact was disclosed Home Depot Modified No quantified impact was disclosed Best Buy Modified No quantified impact was disclosed

105 Exhibit II F Wholesale, retail, services and other (Cont d) 104 Back to industry main page We are required to adopt the new standards in the first quarter of 2018 and are evaluating which transition method we will utilize. We do not believe these standards will impact our recognition of revenue from Company-owned restaurants or our recognition of continuing fees from franchisees, which are based on a percentage of franchise sales. However, the initial fees from franchisees, which are currently recognized as revenue when we have performed substantially all initial services required by the franchise agreement, generally upon the opening of a store, will be recognized over the term of the franchise agreement because the franchise rights will be accounted for as rights to access our symbolic intellectual property. This will result in additional deferred revenue associated with the franchise right upon adoption of the new standard. We recognized $2 million and $5 million of initial fees, including renewal fees, as revenue for the quarter and year to date ended August 31, 2017, respectively. We are evaluating whether the standards will have an impact on transactions currently not included in our revenues such as franchisee contributions to and subsequent expenditures from advertising programs. We act as an agent in regard to these franchisee contributions and expenditures and as such we do not currently include them in our statements of income or cash flows. We are evaluating whether the new standards will impact the principal/agent determinations in these arrangements. If we determine we are the principal in these arrangements we would include contributions to and expenditures from these advertising programs within our Consolidated Statements of Income and Cash Flows. While any such change has the potential to materially impact our gross amount of reported revenues and expenses, such impact would largely be offsetting and we would not expect there to be a significant impact on our reported Net Income. In addition, we are continuing to evaluate the impact the adoption of these standards will have on the recognition and presentation of other revenue transactions with unconsolidated affiliates and franchisees. The new guidance also requires enhanced disclosures, including the identification of performance obligations and significant judgments in measurement and recognition.

106 Exhibit II F Wholesale, retail, services and other (Cont d) 105 Back to industry main page Similarly, we are currently evaluating whether the benefits we receive from incentive payments we may make to our franchisees (e.g. equipment funding provided under the KFC U.S. Acceleration Agreement, see Note 5) are separate and distinct from the benefits we receive from the franchise right. If they cannot be separated from the franchise right then such incentive payments would be amortized as a reduction of revenue over the term of the franchise agreement. Currently, we recognize any payments made to franchisees within our Consolidated Statements of Income when we are obligated to make the payment. We are also evaluating whether the standards will have an impact on transactions currently not included in our revenues and expenses such as franchisee contributions to and subsequent expenditures from advertising cooperatives that we are required to consolidate under current GAAP. We act as an agent in regard to these franchisee contributions and expenditures and as such we do not currently include them in our Consolidated Statements of Income or Cash Flows. See Note 2 of our 2016 Form 10-K for details. We are evaluating whether the new standards will impact the principal/agent determinations in these arrangements. If we determine the aforementioned franchisee contributions represent separate performance obligations from the overall franchise right and that we are the principal in these arrangements we would include contributions to and expenditures from these advertising cooperatives within our Consolidated Statements of Income and Cash Flows. While any such change has the potential to materially impact our gross amount of reported revenues and expenses, such impact would largely be offsetting and we would not expect there to be a significant impact on our reported Net Income. Additionally, the new guidance requires enhanced disclosures, including the identification of performance obligations and significant judgments in measurement and recognition. [Emphasis added]

107 Exhibit II F Wholesale, retail, services and other (Cont d) 106 Back to industry main page The Company continues to evaluate the effect that ASU No will have on its Consolidated Financial Statements and related disclosures and controls. Based on its preliminary assessment, the Company has determined that the adoption of ASU No could impact the timing of revenue recognition through its services, gift card and various incentive programs. ASU No will impact the Company s method of recognizing gift card breakage income, which is currently recognized based upon historical redemption patterns. ASU No requires gift card breakage income to be recognized in proportion to the pattern of rights exercised by the customer when the Company expects to be entitled to breakage. The Company is also evaluating the principal versus agent considerations as it relates to certain arrangements with third parties that could impact the presentation of gross or net revenue reporting. Other areas which could be impacted may be identified as the Company continues its evaluation of ASU No The Company plans to adopt ASU No on January 29, 2018 using the modified retrospective transition method. [Emphasis added]

108 Exhibit II F Wholesale, retail, services and other (Cont d) 107 Back to industry main page Based on our analysis thus far, we believe the impact of adopting the new guidance will be immaterial to our annual and interim financial statements. The primary impacts we have identified thus far are: Minor changes to the timing of recognition of revenues related to gift cards and loyalty programs; Changes to certain immaterial revenues that are currently reported on a gross basis, to be reported on a net basis (with no change in timing of recognition) with consequently no impacts to earnings; and The balance sheet presentation of our sales returns reserve, which will be shown as a separate asset and liability versus the current net presentation. In addition, we expect adoption to lead to increased footnote disclosures, particularly with regard to revenue related balance sheet accounts and revenue by channel and category. We also expect the adoption and consequent changes to our procedures and methodologies to require adjustments to our internal controls over financial reporting. As interpretations of the new rules continue to evolve, we will continue to monitor developments and expect to finalize our conclusions in the fourth quarter of fiscal We plan to adopt this standard in the first quarter of our fiscal Providing we ultimately conclude that the impacts of adoption are immaterial, we would expect to use the modified retrospective method. Under this method, we would recognize the cumulative effect of the changes in retained earnings at the date of adoption, but would not restate prior periods. [Emphasis added]

109 Exhibit II G Consumer products 108 Industry-specific Impact Areas Disclosed: i. Under the current guidance, companies account for sales incentives (e.g. rebates, collaborative funding arrangements, etc.) at the later of the date at which the products are sold or the date at which the programs are offered. The new guidance requires earlier recognition if the sales incentive is implied by companies customary business practices, even if companies have not yet explicitly communicated the intent to make the payment to their customers. Illustrative Disclosure Examples: Company Adoption Method Disclosure of Quantitative Impact Molson Coors Modified No quantified impact was disclosed Coca Cola Modified No quantified impact was disclosed Procter & Gamble Still assessing High-level quantified impact on net sales was disclosed

110 Exhibit II G Consumer products (Cont d) 109 Back to industry main page We currently anticipate that we will utilize the cumulative effect transition method, however, this expectation may change following the completion of our evaluation of the impact of this guidance on our financial statements. We are currently in the process of evaluating the impact this new guidance will have on our financial statements and to our revenue recognition policies, controls and procedures. Based on the work completed to-date and our evaluation of the five-step approach outlined within the guidance, we do not believe that the new guidance will have a significant impact to our core revenue generating activities. However, we currently anticipate that the new standard may impact the presentation of certain cash payments made to customers, as well as the timing of recognition of certain promotional discounts. Specifically, certain cash payments to customers are currently recorded within marketing, general and administrative expenses in the consolidated statements of operations. Upon adoption of the new guidance, we anticipate that many of these cash payments may not meet the specific criteria within the new guidance of providing a distinct good or service, and therefore, would be required to be presented as a reduction of revenue. Furthermore, upon adoption of the new guidance, certain of our promotional discounts, which are deemed variable consideration under the new guidance, will be recognized at the time of the related shipment of product, which is earlier than recognized under current guidance. We anticipate that this change in recognition timing will shift financial statement recognition primarily amongst quarters, however, do not anticipate that the full-year impact will be significant to our financial results. We are continuing to evaluate the potential impact the new guidance will have on our financial statements. We have not fully completed this evaluation and therefore, we may identify further impacts in addition to those identified above. We have begun training related to the implications of the new guidance and commenced implementation efforts for areas of impact identified to-date. As we further complete our evaluation process, we will update our discussion of the anticipated impacts of the new standard as appropriate. [Emphasis added]