MOODYS CORP /DE/, 10-K filed on 2/27/2018
Annual Report
Document and Entity Information (USD $)
In Billions, except Share data in Millions, unless otherwise specified
12 Months Ended
Dec. 31, 2017
Jun. 30, 2017
Document Information [Line Items]
 
 
Document Type
10-K 
 
Amendment Flag
false 
 
Document Period End Date
Dec. 31, 2017 
 
Document Fiscal Year Focus
2017 
 
Document Fiscal Period Focus
FY 
 
Trading Symbol
MCO 
 
Entity Registrant Name
MOODYS CORP /DE/ 
 
Entity Central Index Key
0001059556 
 
Current Fiscal Year End Date
--12-31 
 
Entity Well-known Seasoned Issuer
No 
 
Entity Current Reporting Status
Yes 
 
Entity Voluntary Filers
No 
 
Entity Filer Category
Large Accelerated Filer 
 
Entity Common Stock, Shares Outstanding
191.0 
 
Entity Public Float
 
$ 23.0 
CONSOLIDATED STATEMENTS OF OPERATIONS (USD $)
In Millions, except Per Share data, unless otherwise specified
12 Months Ended
Dec. 31, 2017
Dec. 31, 2016
Dec. 31, 2015
Income Statement [Abstract]
 
 
 
Revenue
$ 4,204.1 
$ 3,604.2 
$ 3,484.5 
Expenses
 
 
 
Operating
1,222.8 
1,026.6 
976.3 
Selling, general and administrative
991.4 
936.4 
921.3 
Restructuring
 
12.0 
 
Depreciation and amortization
158.3 
126.7 
113.5 
Litigation settlement
 
863.8 
 
Acquisition-Related Expenses
22.5 
 
 
Total expenses
2,395.0 
2,965.5 
2,011.1 
Operating income
1,809.1 
638.7 
1,473.4 
Non-operating (expense) income, net
 
 
 
Interest expense, net
(188.4)
(137.8)
(115.1)
Other non-operating income, net
(4.7)
57.1 
21.3 
Purchase price hedge gain
111.1 
 
 
CCXI gains
59.7 
 
 
Total non-operating income (expense), net
(22.3)
(80.7)
(93.8)
Income before provision for income taxes
1,786.8 
558.0 
1,379.6 
Provision for income taxes
779.1 
282.2 
430.0 
Net income
1,007.7 
275.8 
949.6 
Less: Net income attributable to noncontrolling interests
7.1 
9.2 
8.3 
Net income attributable to Moody's
$ 1,000.6 
$ 266.6 
$ 941.3 
Earnings per share
 
 
 
Basic
$ 5.24 
$ 1.38 
$ 4.7 
Diluted
$ 5.15 
$ 1.36 
$ 4.63 
Weighted average shares outstanding
 
 
 
Basic
191.1 
192.7 
200.1 
Diluted
194.2 
195.4 
203.4 
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (USD $)
In Millions, unless otherwise specified
12 Months Ended
Dec. 31, 2017
Dec. 31, 2016
Dec. 31, 2015
Net income
$ 1,007.7 
$ 275.8 
$ 949.6 
Foreign currency adjustments:
 
 
 
Foreign currency translation adjustment - Pre Tax
166.2 
(22.2)
(110.5)
Foreign currency translation adjustment - Tax
23.1 
(5.4)
(14.7)
Foreign currency translation adjustments - Net of Tax
189.3 
(27.6)
(125.2)
Foreign currency translation adjustments - reclassification of (gains) losses included in net income - Pre Tax
 
(36.6)
(0.1)
Foreign currency translation adjustments - reclassification of (gains) losses included in net income - Net of Tax
 
(36.6)
(0.1)
Cash flow hedges:
 
 
 
Net realized and unrealized gains on cash flow hedges - Pre Tax
9.6 
(1.4)
(1.1)
Net realized and unrealized gains on cash flow hedges - Tax
(3.7)
0.5 
 
Net realized and unrealized gains on cash flow hedges - Net of Tax
5.9 
(0.9)
(1.1)
Reclassification of (gains) losses included in net income - Pre Tax
(11.5)
6.0 
 
Reclassification of (gains) losses included in net income - Tax
4.8 
(2.3)
 
Reclassification of (gains) losses included in net income - Net of Tax
(6.7)
3.7 
 
Available for sale securities:
 
 
 
Net unrealized gains on available for sale securities - Pre Tax
2.0 
2.6 
3.3 
Net unrealized gains on available for sale securities - Net of Tax
2.0 
2.6 
3.3 
Reclassification of gains included in net income - Pre Tax
(3.5)
 
(0.9)
Reclassification of gains included in net income - Net of Tax
(3.5)
 
(0.9)
Pension and Other Retirement Benefits:
 
 
 
Amortization of actuarial losses and prior service costs included in net income - Pre Tax
8.7 
9.7 
13.5 
Amortization of actuarial losses and prior service costs included in net income - Tax
(3.3)
(3.7)
(5.2)
Amortization of actuarial losses and prior service costs included in net income - Net of Tax
5.4 
6.0 
8.3 
Net actuarial gains arising during period
20.9 
0.3 
18.5 
Net actuarial gains and prior service costs - Tax
(8.3)
(0.1)
(7.1)
Net actuarial gains and prior service costs - Net of Tax
12.6 
0.2 
11.4 
Total other comprehensive income (loss) - Pre Tax
192.4 
(41.6)
(77.3)
Total other comprehensive income (loss) - Tax
12.6 
(11.0)
(27.0)
Total other comprehensive income (loss) - Net of Tax
205.0 
(52.6)
(104.3)
Comprehensive income (loss)
1,212.7 
223.2 
845.3 
Less: comprehensive income (loss) attributable to noncontrolling interests and noncontrolling interest
19.4 
(18.0)
8.3 
Comprehensive income attributable to Moody's
$ 1,193.3 
$ 241.2 
$ 837.0 
CONSOLIDATED BALANCE SHEETS (USD $)
In Millions, unless otherwise specified
Dec. 31, 2017
Dec. 31, 2016
Current assets:
 
 
Cash and cash equivalents
$ 1,071.5 
$ 2,051.5 
Short-term investments
111.8 
173.4 
Accounts receivable, net of allowances of $36.6 in 2017 and $25.7 in 2016
1,147.2 
887.4 
Other current assets
250.1 
140.8 
Total current assets
2,580.6 
3,253.1 
Property and equipment, net
325.1 
325.9 
Goodwill
3,753.2 
1,023.6 
Intangible assets, net
1,631.6 
296.4 
Deferred tax assets, net
143.8 
316.1 
Other assets
159.9 
112.2 
Total assets
8,594.2 
5,327.3 
Current liabilities:
 
 
Accounts payable and accrued liabilities
750.3 
1,444.3 
Commercial Paper
129.9 
 
Current portion of long term debt
299.5 
300.0 
Deferred revenue
883.6 
683.9 
Total current liabilities
2,063.3 
2,428.2 
Non-current portion of deferred revenue
140.0 
134.1 
Long-term debt
5,111.1 
3,063.0 
Deferred tax liabilities, net
341.6 
104.3 
Unrecognized tax benefits
389.1 
199.8 
Other liabilities
664.0 
425.2 
Total liabilities
8,709.1 
6,354.6 
Contingencies (Note 19)
   
   
Shareholders' (deficit) equity:
 
 
Preferred stock, par value $.01 per share; 10,000,000 shares authorized; no shares issued and outstanding
   
   
Capital surplus
528.6 
477.2 
Retained earnings
7,465.4 
6,688.9 
Treasury stock, at cost; 151,932,157 and 152,208,231 shares of common stock at December 31, 2017 and December 31, 2016, respectively
(8,152.9)
(8,029.6)
Accumulated other comprehensive loss
(172.2)
(364.9)
Total Moody's shareholders' (deficit)
(327.7)
(1,225.0)
Noncontrolling interests
212.8 
197.7 
Total shareholders' (deficit) equity
(114.9)
(1,027.3)
Total liabilities, noncontrolling interest and shareholders' (deficit) equity
8,594.2 
5,327.3 
Series common stock
 
 
Shareholders' (deficit) equity:
 
 
Common stock
   
   
Common Stock
 
 
Shareholders' (deficit) equity:
 
 
Common stock
$ 3.4 
$ 3.4 
CONSOLIDATED BALANCE SHEETS (Parenthetical) (USD $)
In Millions, except Share data, unless otherwise specified
Dec. 31, 2017
Dec. 31, 2016
Accounts receivable, allowances
$ 36.6 
$ 25.7 
Preferred stock, par value
$ 0.01 
$ 0.01 
Preferred stock, shares authorized
10,000,000.00 
10,000,000.00 
Preferred stock, shares issued
   
   
Preferred stock, shares outstanding
   
   
Common stock, shares authorized
1,000,000,000.0 
1,000,000,000.0 
Treasury stock, shares
151,821,294.0 
152,208,231.0 
Series common stock
 
 
Common stock, par value
$ 0.01 
$ 0.01 
Common stock, shares authorized
10,000,000.0 
10,000,000.0 
Common stock, shares outstanding
   
   
Common Stock
 
 
Common stock, par value
$ 0.01 
$ 0.01 
Common stock, shares authorized
1,000,000,000.0 
1,000,000,000.0 
Common stock, shares issued
342,902,272.0 
342,902,272.0 
CONSOLIDATED STATEMENTS OF CASH FLOWS (USD $)
In Millions, unless otherwise specified
12 Months Ended
Dec. 31, 2017
Dec. 31, 2016
Dec. 31, 2015
Cash flows from operating activities
 
 
 
Net income
$ 1,007.7 
$ 275.8 
$ 949.6 
Reconciliation of net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
158.3 
126.7 
113.5 
Stock-based compensation expense
122.9 
98.1 
87.2 
CCXI gains
(59.7)
 
 
Purchase price hedge gain
(111.1)
 
 
FX gain relating to liquidation/sale of subsidiaries
 
(36.6)
 
Deferred income taxes
88.3 
(153.1)
18.1 
Legacy tax matters
 
(1.6)
(6.4)
Changes in assets and liabilities:
 
 
 
Accounts receivable
(148.1)
(104.8)
(25.4)
Other current assets
(70.3)
37.0 
(28.9)
Other assets
12.1 
6.6 
(13.1)
Accounts payable and accrued liabilities
(651.4)
908.7 
51.4 
Deferred revenue
72.9 
74.9 
31.6 
Unrecognized tax benefits and other non-current tax liabilities
63.0 
2.2 
(10.9)
Other liabilities
262.9 
25.3 
31.4 
Net cash provided by operating activities
747.5 
1,259.2 
1,198.1 
Cash flows from investing activities
 
 
 
Capital additions
(90.6)
(115.2)
(89.0)
Purchases of investments
(170.1)
(379.9)
(688.2)
Sales and maturities of investments
238.5 
699.5 
653.1 
Receipts from purchase price hedge
111.1 
 
 
Cash paid for acquisitions and investment in affiliates, net of cash acquired
(3,511.0)
(80.8)
(7.6)
Receipts from settlement of net investment hedges
2.1 
3.8 
39.7 
Payments for settlements of net investment hedges
 
(26.9)
 
Cash received upon diposal of a subsidiary, net of cash transferred to purchaser
 
1.5 
 
Net cash provided by (used in) investing activities
(3,420.0)
102.0 
(92.0)
Cash flows from financing activities
 
 
 
Issuance of notes
2,291.9 
 
852.8 
Repayment of notes
(300.0)
 
 
Issuance of commercial paper
1,837.1 
 
 
Repayments of commercial paper
(1,707.2)
 
 
Proceeds from stock-based compensation plans
55.6 
77.8 
89.2 
Repurchase of shares related to stock-based compensation
(48.8)
(44.4)
(59.5)
Treasury shares
(199.7)
(738.8)
(1,098.1)
Dividends
(290.4)
(285.1)
(272.1)
Dividends to noncontrolling interests
(3.2)
(6.7)
(6.8)
Payment for noncontrolling interest
(8.5)
(45.4)
 
Contingent consideration
 
(0.2)
(1.5)
Debt issuance costs and related fees
(19.6)
(0.1)
(9.5)
Net cash used in financing activities
1,607.2 
(1,042.9)
(505.5)
Effect of exchange rate changes on cash and cash equivalents
85.3 
(24.2)
(62.7)
Increase (decrease) in cash and cash equivalents
(980.0)
294.1 
537.9 
Cash and cash equivalents, beginning of period
2,051.5 
1,757.4 
1,219.5 
Cash and cash equivalents, end of period
$ 1,071.5 
$ 2,051.5 
$ 1,757.4 
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (DEFICIT) (USD $)
In Millions
Total
Common Stock
Capital Surplus
Retained Earnings
Treasury Stock
Accumulated Other Comprehensive Income (Loss)
Total Moody's Shareholders' Equity (Deficit)
Non-Controlling Interests
Beginning Balance at Dec. 31, 2014
$ 42.9 
$ 3.4 
$ 383.9 
$ 6,044.3 
$ (6,384.2)
$ (235.2)
$ (187.8)
$ 230.7 
Beginning Balance (in shares) at Dec. 31, 2014
 
342.9 
 
 
(138.5)
 
 
 
Net income
949.6 
 
 
941.3 
 
 
941.3 
8.3 
Dividends
(283.6)
 
 
(276.6)
 
 
(276.6)
(7.0)
Stock-based compensation
87.5 
 
87.5 
 
 
 
87.5 
 
Shares issued for stock-based compensation plans, net
29.6 
 
(63.5)
 
93.1 
 
29.6 
 
Shares issued for stock-based compensation plans, net (in shares)
 
 
 
 
2.6 
 
 
 
Net excess tax benefit upon settlement of stock-based compensation awards
43.4 
 
43.4 
 
 
 
43.4 
 
Treasury shares repurchased, shares
 
 
 
 
(10.9)
 
 
 
Treasury shares repurchased
(1,098.1)
 
 
 
(1,098.1)
 
(1,098.1)
 
Currency translation adjustment
(125.3)
 
 
 
 
(125.3)
(125.3)
 
Net actuarial losses and prior service costs - Net of Tax
11.4 
 
 
 
 
11.4 
11.4 
 
Amortization of actuarial losses and prior service costs included in net income - Net of Tax
8.3 
 
 
 
 
8.3 
8.3 
 
Unrealized Gains On Available For Sale Securities
2.4 
 
 
 
 
2.4 
2.4 
 
Net unrealized gain on cash flow hedges
(1.1)
 
 
 
 
(1.1)
(1.1)
 
Ending Balance at Dec. 31, 2015
(333.0)
3.4 
451.3 
6,709.0 
(7,389.2)
(339.5)
(565.0)
232.0 
Ending Balance (in shares) at Dec. 31, 2015
 
342.9 
 
 
(146.8)
 
 
 
Net income
275.8 
 
 
266.6 
 
 
266.6 
9.2 
Dividends
(293.4)
 
 
(286.7)
 
 
(286.7)
(6.7)
Stock-based compensation
98.4 
 
98.4 
 
 
 
98.4 
 
Shares issued for stock-based compensation plans, net
33.4 
 
(65.0)
 
98.4 
 
33.4 
 
Shares issued for stock-based compensation plans, net (in shares)
 
 
 
 
2.3 
 
 
 
Net excess tax benefit upon settlement of stock-based compensation awards
32.0 
 
32.0 
 
 
 
32.0 
 
Purchase of noncontrolling interest
(49.1)
 
(39.5)
 
 
 
(39.5)
(9.6)
Treasury shares repurchased, shares
 
 
 
 
(7.7)
 
 
 
Treasury shares repurchased
(738.8)
 
 
 
(738.8)
 
(738.8)
 
Currency translation adjustment
(64.2)
 
 
 
 
(34.2)
(34.2)
(30.0)
Net actuarial losses and prior service costs - Net of Tax
0.2 
 
 
 
 
0.2 
0.2 
 
Amortization of actuarial losses and prior service costs included in net income - Net of Tax
6.0 
 
 
 
 
6.0 
6.0 
 
Unrealized Gains On Available For Sale Securities
2.6 
 
 
 
 
(0.2)
(0.2)
2.8 
Net unrealized gain on cash flow hedges
2.8 
 
 
 
 
2.8 
2.8 
 
Ending Balance at Dec. 31, 2016
(1,027.3)
3.4 
477.2 
6,688.9 
(8,029.6)
(364.9)
(1,225.0)
197.7 
Ending Balance (in shares) at Dec. 31, 2016
 
342.9 
 
 
(152.2)
 
 
 
Net income
1,007.7 
 
 
1,000.6 
 
 
1,000.6 
7.1 
Dividends
(222.8)
 
 
(219.5)
 
 
(219.5)
(3.3)
Adoption of ASU 2016-16
(4.6)
 
 
(4.6)
 
 
(4.6)
 
Stock-based compensation
123.2 
 
123.2 
 
 
 
123.2 
 
Shares issued for stock-based compensation plans, net
9.3 
 
(67.1)
 
76.4 
 
9.3 
 
Shares issued for stock-based compensation plans, net (in shares)
 
 
 
 
1.9 
 
 
 
Purchase of noncontrolling interest
(5.7)
 
(4.7)
 
 
 
(4.7)
(1.0)
Treasury shares repurchased, shares
 
 
 
 
(1.6)
 
 
 
Treasury shares repurchased
(199.7)
 
 
 
(199.7)
 
(199.7)
 
Currency translation adjustment
189.3 
 
 
 
 
176.3 
176.3 
13.0 
Net actuarial losses and prior service costs - Net of Tax
12.6 
 
 
 
 
12.6 
12.6 
 
Amortization of actuarial losses and prior service costs included in net income - Net of Tax
5.4 
 
 
 
 
5.4 
5.4 
 
Unrealized Gains On Available For Sale Securities
(1.5)
 
 
 
 
(0.8)
(0.8)
(0.7)
Net unrealized gain on cash flow hedges
(0.8)
 
 
 
 
(0.8)
(0.8)
 
Ending Balance at Dec. 31, 2017
$ (114.9)
$ 342.9 
$ 528.6 
$ 7,465.4 
$ (8,152.9)
$ (172.2)
$ (327.7)
$ 212.8 
Ending Balance (in shares) at Dec. 31, 2017
 
3.4 
 
 
(151.9)
 
 
 
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (DEFICIT) (Parenthetical) (USD $)
In Millions, unless otherwise specified
12 Months Ended
Dec. 31, 2017
Dec. 31, 2016
Dec. 31, 2015
Currency translation adjustment, tax
$ 23.1 
$ 5.4 
$ 14.7 
Net actuarial losses and prior service costs - Tax
8.3 
0.1 
7.1 
Amortization of actuarial losses and prior service costs included in net income - Tax
3.3 
3.7 
5.2 
Net unrealized gain on cash flow hedges, tax
$ 1.1 
$ 1.8 
 
GLOSSARY OF TERMS AND ABBREVIATIONS
GLOSSARY OF TERMS AND ABBREVIATIONS
GLOSSARY OF TERMS AND ABBREVIATIONS
The following terms, abbreviations and acronyms are used to identify frequently used terms in this report:
TERMDEFINITION
Acquisition-Related AmortizationAmortization of acquired definite-lived intangible assets acquired by the Company from all business combination transactions
Acquisition-Related ExpensesConsists of expenses incurred to complete and integrate the acquisition of Bureau van Dijk for which the integration will be a multi-year effort
Adjusted Diluted EPSDiluted EPS excluding the impact of certain items as detailed in Item 7 in the section entitled “Non-GAAP Financial Measures”
Adjusted Net IncomeNet Income excluding the impact of certain items as detailed in Item 7 in the section entitled “Non-GAAP Financial Measures”
Adjusted Operating Income Operating income excluding certain items as detailed in Item 7 in the section entitled “Non-GAAP Financial Measures”
Adjusted Operating Margin Adjusted Operating Income divided by revenue
AmericasRepresents countries within North and South America, excluding the U.S.
AOCIAccumulated other comprehensive income (loss); a separate component of shareholders’ (deficit) equity
ASCThe FASB Accounting Standards Codification; the sole source of authoritative GAAP as of July 1, 2009 except for rules and interpretive releases of the SEC, which are also sources of authoritative GAAP for SEC registrants
Asia-PacificRepresents countries in Asia including but not limited to: Australia, China, India, Indonesia, Japan, Korea, Malaysia, Singapore, Sri Lanka and Thailand
ASUThe FASB Accounting Standards Update to the ASC. It also provides background information for accounting guidance and the bases for conclusions on the changes in the ASC. ASUs are not considered authoritative until codified into the ASC
Basel IICapital adequacy framework published in June 2004 by the Basel Committee on Banking Supervision
Basel IIIA new global regulatory standard on bank capital adequacy and liquidity agreed by the members of the Basel Committee on Banking Supervision. Basel III was developed in a response to the deficiencies in financial regulation revealed by the global financial crisis. Basel III strengthens bank capital requirements and introduces new regulatory requirements on bank liquidity and bank leverage
BlackBoxBlackBox Logic; a leading provider of Residential Mortgage-Backed securities loan level data. The Company acquired the customer base and products of BlackBox Logic in December 2015
BoardThe board of directors of the Company
BPSBasis points
Bureau van DijkBureau van Dijk Electronic Publishing, B.V., a global provider of business intelligence and company information; acquired by the company on August 10, 2017 via acquisition of yellow Maple I B.V., an indirect parent of Bureau van Dijk
CCARComprehensive Capital Analysis and Review; annual review by the Federal Reserve in the U.S. to ensure that financial institutions have sufficient Capital in times of economic and financial stress and that they have robust, forward-looking capital-planning processes that account for their unique risks
CCXIChina Chen Xin International Credit Rating Co. Ltd.; China’s first and largest domestic credit rating agency approved by the People’s Bank of China; the Company acquired a 49% interest in 2006; currently Moody’s owns 30% of CCXI
CCXI GainIn the first quarter of 2017 CCXI, as a part of a strategic business realignment, issued additional capital to its majority shareholder in exchange for a ratings business wholly-owned by the majority shareholder and which has the right to rate a different class of debt instruments in the Chinese market. The capital issuance by CCXI in exchange for the ratings business diluted Moody’s ownership interest in CCXI to 30% of a larger business and resulted in a $59.7 million non-cash, non-taxable gain
CFGCorporate finance group; an LOB of MIS
CLOCollateralized loan obligation
CMBSCommercial mortgage-backed securities; part of the CREF asset class within SFG
CommissionEuropean Commission
Common StockThe Company’s common stock
CompanyMoody’s Corporation and its subsidiaries; MCO; Moody’s
CopalCopal Partners; an acquisition completed in November 2011; part of the MA segment; leading provider of offshore research and analytical services to institutional investors
CouncilCouncil of the European Union
CP Commercial paper
CP NotesUnsecured commercial paper issued under the CP Program
CP ProgramA program entered into on August 3, 2016 allowing the Company to privately place CP up to a maximum of $1 billion for which the maturity may not exceed 397 days from the date of issue.
CRAsCredit rating agencies
CREFCommercial real estate finance which includes REITs, commercial real estate CDOs and mortgage-backed securities; part of SFG
CSICSI Global Education, Inc.; an acquisition completed in November 2010; part of the PS LOB and FSTC reporting unit within the MA segment; a provider of financial learning, credentials, and certification services primarily in Canada
CSPPCorporate Sector Purchase Programme;  quantitative easing program implemented by the ECB. This program allows the central bank to purchase bonds issued by European companies, as well as provide access to the secondary bond market in which existing corporate bonds trade
D&ADepreciation and amortization
DBPPsDefined benefit pension plans
DBRSDominion Bond Rating Service
DCFDiscounted cash flow; a fair value calculation methodology whereby future projected cash flows are discounted back to their present value
Debt/EBITDARatio of Total Debt to EBITDA
Directors’ PlanThe 1998 Moody’s Corporation Non-Employee Directors’ Stock Incentive Plan
Distribution DateSeptember30, 2000; the date which Old D&B separated into two publicly traded companies – Moody’s Corporation and New D&B
DOJU.S. Department of Justice
EBITDAEarnings before interest, taxes, depreciation and amortization
ECBEuropean Central Bank
ECCAEconomics and Consumer Credit Analytics; a business within the RD&A LOB which provides economic and consumer credit trend analytics
EMEARepresents countries within Europe, the Middle East and Africa
EPSEarnings per share
EquilibriumA leading provider of credit rating and research services in Peru and Panama; acquired by Moody’s in May 2015
ERSThe enterprise risk solutions LOB within MA, which offers risk management software products as well as software implementation services and related risk management advisory engagements
ESAEconomics and Structured Analytics; part of the RD&A line of business within MA
ESGEnviromental, Social and Governance
ESMAEuropean Securities and Markets Authority
ESPEstimated Selling Price; estimate of selling price, as defined in the ASC, at which the vendor would transact if the deliverable were sold by the vendor regularly on a stand-alone basis
ESPPThe 1999 Moody’s Corporation Employee Stock Purchase Plan
ETREffective tax rate
EUEuropean Union
EUREuros
European Ratings PlatformCentral credit ratings website administered by ESMA
Excess Tax BenefitsThe difference between the tax benefit realized at exercise of an option or delivery of a restricted share and the tax benefit recorded at the time the option or restricted share is expensed under GAAP
Exchange ActThe Securities Exchange Act of 1934, as amended
FASBFinancial Accounting Standards Board
FIGFinancial institutions group; an LOB of MIS
FitchFitch Ratings, a part of the Fitch Group
Financial Reform ActDodd-Frank Wall Street Reform and Consumer Protection Act
Free Cash FlowNet cash provided by operating activities less cash paid for capital additions
FSTCFinancial Services Training and Certifications; part of the PS LOB and a reporting unit within the MA reportable segment; consists of on-line and classroom-based training services and CSI
FXForeign exchange
GAAPU.S. Generally Accepted Accounting Principles
GBPBritish pounds
GDPGross domestic product
GGYGilliland Gold Young; a leading provider of advanced actuarial software for the global insurance industry. The Company acquired GGY on March 1, 2016; Part of the ERS LOB and reporting unit within the MA reportable segment
ICRAICRA Limited; a leading provider of credit ratings and research in India. The Company previously held 28.5% equity ownership and in June 2014, increased that ownership stake to just over 50% through the acquisition of additional shares
ICRA AcquisitionThe June 2014 purchase of an additional interest in ICRA resulting in a majority ownership of ICRA; ICRAs results are consolidated into Moody’s financial statements on a three-month lag and accordingly the Company began including the results of operations for ICRA in its consolidated financial statements beginning in the fourth quarter of 2014
ICRA GainGain relating to the ICRA Acquisition; U.S. GAAP requires the remeasurement to fair value of the previously held non-controlling shares upon obtaining a controlling interest in a step-acquisition. This remeasurement of the Company’s equity investment in ICRA to fair value resulted in a pre-tax gain of $102.8 million ($78.5 million after tax) in the second quarter of 2014
ICTEASICRA Techno Analytics; formerly a wholly-owned subsidiary of ICRA; divested by ICRA in the fourth quarter of 2016
Intellectual PropertyThe Company’s intellectual property, including but not limited to proprietary information, trademarks, research, software tools and applications, models and methodologies, databases, domain names, and other proprietary materials
IRSInternal Revenue Service
ITInformation technology
KISKorea Investors Service, Inc; a leading Korean rating agency and consolidated subsidiary of the Company
KIS PricingKorea Investors Service Pricing, Inc; a leading Korean provider of fixed income securities pricing and consolidated subsidiary of the Company
KIS ResearchKorea Investors Service Research; a Korean provider of financial research and consolidated subsidiary of the Company
KoreaRepublic of South Korea
Legacy Tax Matter(s)Exposures to certain potential tax liabilities assumed in connection with the Company's spin-off from Dun & Bradstreet in 2000
LIBORLondon Interbank Offered Rate
LOBLine of business
M&AMergers and acquisitions
MAMoody’s Analytics – a reportable segment of MCO formed in January 2008 which provides a wide range of products and services that support financial analysis and risk management activities of institutional participants in global financial markets; consists of three LOBs – RD&A, ERS and PS
Make Whole AmountThe prepayment penalty relating to the Series 2007-1 Notes, 2010 Senior Notes, 2012 Senior Notes, 2013 Senior Notes, 2014 Senior Notes (5-year), 2014 Senior Notes (30-year) and the 2015 Senior Notes, 2017 Senior Notes, 2017 Private Placement Notes Due 2023 and 2028 a premium based on the excess, if any, of the discounted value of the remaining scheduled payments over the prepaid principal
MAKSMoody's Analytics Knowledge Services; formerly known as Copal Amba; provides offshore research and analytic services to the global financial and corporate sectors; part of the PS LOB and a reporting unit within the MA reportable segment
MCOMoody’s Corporation and its subsidiaries; the Company; Moody’s
MD&AManagement’s Discussion and Analysis of Financial Condition and Results of Operations
MISMoody’s Investors Service – a reportable segment of MCO; consists of five LOBs – SFG, CFG, FIG, PPIF and MIS Other
MIS OtherConsists of non-ratings revenue from ICRA, KIS Pricing and KIS Research. These businesses are components of MIS; MIS Other is an LOB of MIS
Moody’sMoody’s Corporation and its subsidiaries; MCO; the Company
Net IncomeNet income attributable to Moody’s Corporation, which excludes net income from consolidated noncontrolling interests belonging to the minority interest holder
New D&BThe New D&B Corporation – which comprises the D&B business after September 30, 2000
NMPercentage change is not meaningful
Non-GAAPA financial measure not in accordance with GAAP; these measures, when read in conjunction with the Company’s reported results, can provide useful supplemental information for investors analyzing period-to-period comparisons of the Company’s performance, facilitate comparisons to competitors’ operating results and to provide greater transparency to investors of supplemental information used by management in its financial and operational decision making
NRSRONationally Recognized Statistical Rating Organization
OCIOther comprehensive income (loss); includes gains and losses on cash flow and net investment hedges, unrealized gains and losses on available for sale securities, certain gains and losses relating to pension and other retirement benefit obligations and foreign currency translation adjustments
Old D&BThe former Dun and Bradstreet Company which distributed New D&B shares on September 30, 2000, and was renamed Moody’s Corporation
Other Retirement PlanThe U.S. retirement healthcare and U.S. retirement life insurance plans
PPIFPublic, project and infrastructure finance; an LOB of MIS
Profit Participation PlanDefined contribution profit participation plan that covers substantially all U.S. employees of the Company
PSProfessional Services, an LOB within MA consisting of MAKS and FSTC that provides offshore research and analytical services as well as financial training and certification programs
Purchase Price HedgeForeign currency collar and forward contracts entered by the Company to economically hedge the Bureau van Dijk euro dominated purchase price
Purchase Price Hedge GainGain on foreign currency collars to economically hedge the Bureau van Dijk euro denominated purchase price
RD&AResearch, Data and Analytics; an LOB within MA that produces, sells and distributes research, data and related content as well as business intelligence products. Includes products generated by MIS, such as analyses on major debt issuers, industry studies, and commentary on topical credit events, as well as economic research, data, quantitative risk scores, other analytical tools that are produced within MA and business intelligence and company information products
Reform ActCredit Rating Agency Reform Act of 2006
REITReal Estate Investment Trust
Relationship RevenueFor MIS represents monitoring of a rated debt obligation and/or entities that issue such obligations, as well as revenue from programs such as commercial paper, medium-term notes and shelf registrations. For MIS Other represents subscription-based revenue. For MA, represents subscription-based license and maintenance revenue
Retirement PlansMoody’s funded and unfunded pension plans, the healthcare plans and life insurance plans
S&PS&P Global Ratings, a division of S&P Global Inc.
SAVStructured Analytics and Valuation; a business within the RD&A LOB which provides data and analytics for securitized assets
SCDMSCDM Financial, a leading provider of analytical tools for participants in securitization markets. Moody’s acquired SCDM’s structured finance data and analytics business in February 2017
SECU.S. Securities and Exchange Commission
Securities ActSecurities Act of 1933, as amended
Series 2007-1 NotesPrincipal amount of $300 million, 6.06% senior unsecured notes due in September 2017 pursuant to the 2007 Agreement; prepaid in March 2017
Settlement ChargeCharge of $863.8 million recorded in the fourth quarter of 2016 related to an agreement entered into on January 13, 2017 with the U.S. Department of Justice and the attorneys general of 21 U.S. states and the District of Columbia to resolve pending and potential civil claims related to credit ratings that MIS assigned to certain structured finance instruments in the financial crisis era
SFGStructured finance group; an LOB of MIS
SG&ASelling, general and administrative expenses
Solvency IIEU directive 2009/138/EC that codifies the amount of capital that EU insurance companies must hold to reduce insolvency
Stock PlansThe Old D&B’s 1998 Key Employees’ Stock Incentive Plan and the Restated 2001 Moody’s Corporation Key Employees’ Stock Incentive Plan
Tax Cuts and Jobs Act Legislation enacted into law in the lade December 2017 which significantly amends the tax code in the U.S.
Total DebtAll indebtedness of the Company as reflected on the consolidated balance sheets
TPEThird party evidence, as defined in the ASC, used to determine selling price based on a vendor’s or any competitor’s largely interchangeable products or services in standalone sales transactions to similarly situated customers
Transaction RevenueFor MIS, represents the initial rating of a new debt issuance as well as other one-time fees. For MIS Other, represents revenue from professional services as well as data services, research and analytical engagements. For MA, represents software license fees and revenue from risk management advisory projects, training and certification services, and research and analytical engagements
U.K.United Kingdom
U.S.United States
USDU.S. dollar
UTBsUnrecognized tax benefits
UTPsUncertain tax positions
VSOEVendor specific objective evidence; as defined in the ASC, evidence of selling price limited to either of the following: the price charged for a deliverable when it is sold separately, or for a deliverable not yet being sold separately, the price established by management having the relevant authority
WACCWeighted average cost of capital
1998 PlanOld D&B’s 1998 Key Employees’ Stock Incentive Plan
2001 PlanThe Amended and Restated 2001 Moody’s Corporation Key Employees’ Stock Incentive Plan
2007 AgreementNote purchase agreement dated September 7, 2007, relating to the Series 2007-1 Notes
2010 IndentureSupplemental indenture and related agreements dated August 19, 2010, relating to the 2010 Senior Notes
2010 Senior NotesPrincipal amount of $500 million, 5.50% senior unsecured notes due in September 2020 pursuant to the 2010 Indenture
2012 FacilityRevolving credit facility of $1 billion entered into on April 18,2012; was replaced with the 2015 Facility
2012 IndentureSupplemental indenture and related agreements dated August 18, 2012, relating to the 2012 Senior Notes
2012 Senior NotesPrincipal amount of $500 million, 4.50% senior unsecured notes due in September 2022 pursuant to the 2012 Indenture
2013 IndentureSupplemental indenture and related agreements dated August 12, 2013, relating to the 2013 Senior Notes
2013 Senior NotesPrincipal amount of the $500 million, 4.875% senior unsecured notes due in February 2024 pursuant to the 2013 Indenture
2014 IndentureSupplemental indenture and related agreements dated July 16, 2014, relating to the 2014 Senior Notes
2014 Senior Notes (5-Year)Principal amount of $450 million, 2.75% senior unsecured notes due in July 2019
2014 Senior Notes (30-Year)Principal amount of $600 million, 5.25% senior unsecured notes due in July 2044
2015 FacilityFive-year unsecured revolving credit facility, with capacity to borrow up to $1 billion; replaces the 2012 Facility
2015 IndentureSupplemental indenture and related agreements dated March 9, 2015, relating to the 2015 Senior Notes
2015 Senior NotesPrincipal amount €500 million, 1.75% senior unsecured notes issued March 9, 2015 and due in March 2027
2017 Bridge Credit FacilityBridge Credit Agreement entered into in May 2017 pursuant to the definitive agreement to acquire Bureau van Dijk; this facility was terminated in June 2017 upon issuance of the 2017 Private Placement Notes Due 2023 and 2028
2017 Floating Rate Senior NotesPrincipal amount of $300 million, floating rate senior unsecured notes due in September 2018
2017 IndentureCollectively the Supplemental indenture and related agreements dated March 2, 2017, relating to the 2017 Floating Rate Senior Notes and 2017 Senior Notes and the Supplemental indenture and related agreements dated June 12, 2017, relating to the 2017 Private Placement Notes Due 2023 and 2017 Due 2028
2017 Private Placement Notes due 2023Principal amount of $500 million, 2.625% senior unsecured notes due January 15, 2023
2017 Private Placement Notes Due 2028 Principal amount $500 million, 3.250% senior unsecured notes due January 15, 2028
2017 Senior NotesPrincipal amount of $500 million, 2.75% unsecured notes due December 2021
2017 Term Loan$500 million, three-year term loan facility entered into on June 6, 2017 for which the Company drew down $500 million on August 8, 2017 to fund the acquisition of Bureau van Dijk
7WTC The Company’s corporate headquarters located at 7 World Trade Center in New York, NY
DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION

NOTE 1 DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION

Moody’s is a provider of (i) credit ratings; (ii) credit, capital markets and economic research, data and analytical tools; (iii) software solutions that support financial risk management activities; (iv) quantitatively derived credit scores; (v) financial services training and certification services; (vi) offshore financial research and analytical services; and (vii) company information and business intelligence products. Moody’s reports in reportable segments: MIS and MA.

MIS, the credit rating agency, publishes credit ratings on a wide range of debt obligations and the entities that issue such obligations in markets worldwide. Revenue is primarily derived from the originators and issuers of such transactions who use MIS ratings in the distribution of their debt issues to investors. Additionally, MIS earns revenue from certain non-ratings-related operations which consist primarily of financial instrument pricing services in the Asia-Pacific region as well as revenue from ICRA’s non-ratings operations. The revenue from these operations is included in the MIS Other LOB and is not material to the results of the MIS segment.

The MA segment develops a wide range of products and services that support financial analysis and risk management activities of institutional participants in global financial markets. Within its RD&A business, MA distributes research and data developed by MIS as part of its ratings process, including in-depth research on major debt issuers, industry studies and commentary on topical credit-related events. The RD&A business also produces economic research and data and analytical tools such as quantitative credit risk scores as well as business intelligence and company information products. Within its ERS business, MA provides software solutions as well as related risk management services. The PS business provides offshore analytical and research services along with financial training and certification programs.

Certain reclassifications have been made to prior period amounts to conform to the current presentation.

Adoption of New Accounting Standard

In the first quarter of 2017, the Company adopted ASU No. 2016-09 “Improvements to Employee Share-Based Payment Accounting”. As required by ASU 2016-09, Excess Tax Benefits or shortfalls recognized on stock-based compensation are reflected in the consolidated statement of operations as a component of the provision for income taxes on a prospective basis. Prior to the adoption of this ASU, Excess Tax Benefits and shortfalls were recorded to capital surplus within shareholders’ deficit. The impact of this adoption was a $39.5 million benefit to the provision for income taxes for the year end December 31, 2017.

Additionally, in accordance with this ASU, Excess Tax Benefits or shortfalls recognized on stock-based compensation are classified as operating cash flows in the consolidated statement of cash flows, and the Company has applied this provision on a retrospective basis. Under previous accounting guidance, the Excess Tax Benefits or shortfalls were shown as a reduction to operating activity and an increase to financing activity. Furthermore, the Company has elected to continue to estimate the number of stock-based awards expected to vest, rather than accounting for award forfeitures as they occur, to determine the amount of stock-based compensation cost recognized in each period. The impact to the Company’s statement of cash flows for prior year relating to the adoption of this provision of the ASU is set forth in the table below:

As reported December 31, 2016ReclassificationDecember 31, 2016 as adjustedAs reported December 31, 2015ReclassificationDecember 31, 2015 as adjusted
Net cash provided by operating activities$1,226.1$33.1$1,259.2$1,153.6$44.5$1,198.1
Net cash used in financing activities$(1,009.8)$(33.1)$(1,042.9)$(461.0)$(44.5)$(505.5)
DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION (Tables)
Schedule of Change in Cash Flow Item Due to Adoption of Employee Share-Based Payment Accounting Policy
As reported December 31, 2016ReclassificationDecember 31, 2016 as adjustedAs reported December 31, 2015ReclassificationDecember 31, 2015 as adjusted
Net cash provided by operating activities$1,226.1$33.1$1,259.2$1,153.6$44.5$1,198.1
Net cash used in financing activities$(1,009.8)$(33.1)$(1,042.9)$(461.0)$(44.5)$(505.5)
Change in Financial Statement due to adoption of Policy (Details) (USD $)
In Millions, unless otherwise specified
12 Months Ended
Dec. 31, 2017
Dec. 31, 2016
Dec. 31, 2015
Item Effected [Line Items]
 
 
 
Net cash provided by operating activities
$ 747.5 
$ 1,259.2 
$ 1,198.1 
Net cash used in financing activities
1,607.2 
(1,042.9)
(505.5)
As Previously Reported [Member]
 
 
 
Item Effected [Line Items]
 
 
 
Net cash provided by operating activities
 
1,226.1 
1,153.6 
Net cash used in financing activities
 
(1,009.8)
(461.0)
Reclassification [Member]
 
 
 
Item Effected [Line Items]
 
 
 
Net cash provided by operating activities
 
33.1 
44.5 
Net cash used in financing activities
 
$ (33.1)
$ (44.5)
Description of Business and Basis of Presentation - Additional Information (Detail) (USD $)
In Millions, unless otherwise specified
12 Months Ended
Dec. 31, 2017
Segment Reporting Information [Line Items]
 
Number of reportable segments
Excess tax benefit effect of adoption adjustment on provision for income taxes
$ 39.5 
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Consolidation

The consolidated financial statements include those of Moody’s Corporation and its majority- and wholly-owned subsidiaries. The effects of all intercompany transactions have been eliminated. Investments in companies for which the Company has significant influence over operating and financial policies but not a controlling interest are accounted for on an equity basis whereby the Company records its proportional share of the investment’s net income or loss as part of other non-operating income (expense), net and any dividends received reduce the carrying amount of the investment. The Company applies the guidelines set forth in Topic 810 of the ASC in assessing its interests in variable interest entities to decide whether to consolidate that entity. The Company has reviewed the potential variable interest entities and determined that there are no consolidation requirements under Topic 810 of the ASC. The Company consolidates its ICRA subsidiaries on a three month lag.

Cash and Cash Equivalents

Cash equivalents principally consist of investments in money market mutual funds and money market deposit accounts as well as high-grade commercial paper and certificates of deposit with maturities of three months or less when purchased.

Short-term Investments

Short-term investments are securities with maturities greater than 90 days at the time of purchase that are available for operations in the next 12 months. The Company’s short-term investments primarily consist of certificates of deposit and their cost approximates fair value due to the short-term nature of the instruments. Interest and dividends on these investments are recorded into income when earned.

Property and Equipment

Property and equipment are stated at cost and are depreciated using the straight-line method over their estimated useful lives. Expenditures for maintenance and repairs that do not extend the economic useful life of the related assets are charged to expense as incurred.

Research and Development Costs

All research and development costs are expensed as incurred. These costs primarily reflect the development of credit processing software and quantitative credit risk assessment products sold by the MA segment.

Research and development costs were $42.0 million, $40.1 million, and $29.1 million for the years ended December 31, 2017, 2016 and 2015, respectively, and are included in operating expenses within the Company’s consolidated statements of operations. These costs generally consist of professional services provided by third parties and compensation costs of employees.

Costs for internally developed computer software that will be sold, leased or otherwise marketed are capitalized when technological feasibility has been established. These costs primarily relate to the development or enhancement of products in the ERS business and generally consist of professional services provided by third parties and compensation costs of employees that develop the software. Judgment is required in determining when technological feasibility of a product is established and the Company believes that technological feasibility for its software products is reached after all high-risk development issues have been resolved through coding and testing. Generally, this occurs shortly before the products are released to customers. Accordingly, costs for internally developed computer software that will be sold, leased or otherwise marketed that were eligible for capitalization under Topic 985 of the ASC were immaterial for the years ended December 31, 2017, 2016 and 2015.

Computer Software Developed or Obtained for Internal Use

The Company capitalizes costs related to software developed or obtained for internal use. These assets, included in property and equipment in the consolidated balance sheets, relate to the Company’s financial, website and other systems. Such costs generally consist of direct costs for third-party license fees, professional services provided by third parties and employee compensation, in each case incurred either during the application development stage or in connection with upgrades and enhancements that increase functionality. Such costs are depreciated over their estimated useful lives on a straight-line basis. Costs incurred during the preliminary project stage of development as well as maintenance costs are expensed as incurred.

Long-Lived Assets, Including Goodwill and Other Acquired Intangible Assets

Moody’s evaluates its goodwill for impairment at the reporting unit level, defined as an operating segment or one level below an operating segment, annually as of July 31 or more frequently if impairment indicators arise in accordance with ASC Topic 350.

The Company evaluates the recoverability of goodwill using a two-step impairment test approach at the reporting unit level. In the first step, the Company assesses various qualitative factors to determine whether the fair value of a reporting unit may be less than its carrying amount. If a determination is made that, based on the qualitative factors, an impairment does not exist, the Company is not required to perform further testing. If the aforementioned qualitative assessment results in the Company concluding that it is more likely than not that the fair value of a reporting unit may be less than its carrying amount, the fair value of the reporting unit will be determined and compared to its carrying value including goodwill. If the fair value of the reporting unit exceeds the carrying value of the net assets assigned to that unit, goodwill is not impaired and the Company is not required to perform further testing. If the fair value of the reporting unit is less than the carrying value, the Company will recognize the difference as an impairment charge.

The Company evaluates its reporting units for impairment on an annual basis, or more frequently if there are changes in the reporting structure of the Company due to acquisitions or realignments or if there are indicators of potential impairment. For the reporting units where the Company is consistently able to conclude that an impairment does not exist using only a qualitative approach, the Company’s accounting policy is to perform the second step of the aforementioned goodwill impairment assessment at least once every three years. Goodwill is assigned to a reporting unit at the date when an acquisition is integrated into one of the established reporting units, and is based on which reporting unit is expected to benefit from the synergies of the acquisition.

For purposes of assessing the recoverability of goodwill, the Company has seven primary reporting units at December 31, 2017: two within the Company’s ratings business (one for the ICRA business and one that encompasses all of Moody’s other ratings operations) and five reporting units within MA: RD&A, ERS, FSTC, MAKS and Bureau van Dijk. The RD&A reporting unit encompasses the distribution of investor-oriented research and data developed by MIS as part of its ratings process, in-depth research on major debt issuers, industry studies, economic research and commentary on topical events and credit analytic tools. The ERS reporting unit consists of credit risk management and compliance software that is sold on a license or subscription basis as well as related advisory services for implementation and maintenance. The FSTC reporting unit consists of the portion of the MA business that offers both credit training as well as other professional development training and certification services. The MAKS reporting unit consists of offshore research and analytical services. The Bureau van Dijk reporting unit consists of business intelligence and company information products.

Amortizable intangible assets are reviewed for recoverability whenever events or changes in circumstances indicate that the carrying amount may not be recoverable.

Rent Expense

The Company records rent expense on a straight-line basis over the life of the lease. In cases where there is a free rent period or future fixed rent escalations the Company will record a deferred rent liability. Additionally, the receipt of any lease incentives will be recorded as a deferred rent liability which will be amortized over the lease term as a reduction of rent expense.

Stock-Based Compensation

The Company records compensation expense for all share-based payment award transactions granted to employees based on the fair value of the equity instrument at the time of grant. This includes shares issued under stock option and restricted stock plans. The accounting for Excess Tax Benefits or shortfalls on stock-based compensation is more fully discussed in Note 1.

Derivative Instruments and Hedging Activities

Based on the Company’s risk management policy, from time to time the Company may use derivative financial instruments to reduce exposure to changes in foreign exchange rates and interest rates. The Company does not enter into derivative financial instruments for speculative purposes. All derivative financial instruments are recorded on the balance sheet at their respective fair values. The changes in the value of derivatives that qualify as fair value hedges are recorded with a corresponding adjustment to the carrying value of the item being hedged. Changes in the derivative’s fair value that qualify as cash flow hedges are recorded to other comprehensive income or loss, to the extent the hedge is effective, and such amounts are reclassified from accumulated other comprehensive income or loss to earnings in the same period or periods during which the hedged transaction affects income. Changes in the derivative’s fair value that qualify as net investment hedges are recorded to other comprehensive income or loss, to the extent the hedge is effective. Any changes in the fair value of derivatives that the Company does not designate as hedging instruments under Topic 815 of the ASC are recorded in the consolidated statements of operations in the period in which they occur.

Revenue Recognition

Revenue is recognized when persuasive evidence of an arrangement exists, delivery has occurred or the services have been provided and accepted by the customer when applicable, fees are determinable and the collection of resulting receivables is considered probable.

Pursuant to ASC Topic 605, when a sales arrangement contains multiple deliverables, the Company allocates revenue to each deliverable based on its relative selling price which is determined based on its vendor specific objective evidence if available, third party evidence if VSOE is not available, or estimated selling price if neither VSOE nor TPE is available.

The Company’s products and services will generally qualify as separate units of accounting under ASC Topic 605. The Company evaluates each deliverable in an arrangement to determine whether it represents a separate unit of accounting. A deliverable constitutes a separate unit of accounting when it has stand-alone value to the customers and if the arrangement includes a customer refund or return right relative to the delivered item and the delivery and performance of the undelivered item is considered probable and substantially in the Company’s control. In instances where the aforementioned criteria are not met, the deliverable is combined with the undelivered items and revenue recognition is determined as one single unit.

The Company determines whether its selling price in a multi-element transaction meets the VSOE criteria by using the price charged for a deliverable when sold separately or, if the deliverable is not yet being sold separately, the price established by management having the relevant authority to establish such a price. In instances where the Company is not able to establish VSOE for all deliverables in a multiple element arrangement, which may be due to the Company infrequently selling each element separately, not selling products within a reasonably narrow price range, or only having a limited sales history, the Company attempts to establish TPE for deliverables. The Company determines whether TPE exists by evaluating largely similar and interchangeable competitor products or services in standalone sales to similarly situated customers. However, due to the difficulty in obtaining third party pricing, possible differences in its market strategy from that of its peers and the potential that products and services offered by the Company may contain a significant level of differentiation and/or customization such that the comparable pricing of products with similar functionality cannot be obtained, the Company generally is unable to reliably determine TPE. Based on the selling price hierarchy established by ASC Topic 605, when the Company is unable to establish selling price using VSOE or TPE, the Company will establish an ESP. ESP is the price at which the Company would transact a sale if the product or service were sold on a stand-alone basis. The Company establishes its best estimate of ESP considering internal factors relevant to is pricing practices such as costs and margin objectives, standalone sales prices of similar products, percentage of the fee charged for a primary product or service relative to a related product or service, and customer segment and geography. Additional consideration is also given to market conditions such as competitor pricing strategies and market trend. The Company reviews its determination of VSOE, TPE and ESP on an annual basis or more frequently as needed.

In the MIS segment, revenue attributed to initial ratings of issued securities is recognized when the rating is delivered to the issuer. Revenue attributed to monitoring of issuers or issued securities is recognized ratably over the period in which the monitoring is performed, generally one year. In the case of commercial mortgage-backed securities, structured credit, international residential mortgage-backed and asset-backed securities, issuers can elect to pay the monitoring fees upfront. These fees are deferred and recognized over the future monitoring periods based on the expected lives of the rated securities, which was approximately 24 years on a weighted average basis at December 31, 2017. At December 31, 2017, 2016 and 2015, deferred revenue related to these securities was approximately $140.1 million, $133.0 million, and $121.0 million, respectively.

Multiple element revenue arrangements in the MIS segment are generally comprised of an initial rating and the related monitoring service. In instances where monitoring fees are not charged for the first year monitoring effort, fees are allocated to the initial rating and monitoring services based on the relative selling price of each service to the total arrangement fees. The Company generally uses ESP in determining the selling price for its initial ratings as the Company rarely provides initial ratings separately without providing related monitoring services and thus is unable to establish VSOE or TPE for initial ratings.

MIS estimates revenue for ratings of commercial paper for which, in addition to a fixed annual monitoring fee, issuers are billed quarterly based on amounts outstanding. Revenue is accrued each quarter based on estimated amounts outstanding and is billed when actual data is available. The estimate is determined based on the issuers’ most recent reported quarterly data. At December 31, 2017, 2016 and 2015, accounts receivable included approximately $27.0 million, $25.0 million, and $24.0 million, respectively, related to accrued commercial paper revenue. Historically, MIS has not had material differences between the estimated revenue and the actual billings. Furthermore, for certain annual monitoring services, fees are not invoiced until the end of the annual monitoring period and revenue is accrued ratably over the monitoring period. At December 31, 2017, 2016, and 2015, accounts receivable included approximately $185.0 million, $159.1 million, and $146.4 million, respectively, relating to accrued annual monitoring service revenue.

In the MA segment, products and services offered by the Company include software licenses and related maintenance, subscriptions, and professional services. Revenue from subscription based products, such as research and data subscriptions and certain software-based credit risk management subscription products, is recognized ratably over the related subscription period, which is principally one year. Revenue from sale of perpetual licenses of credit processing software is generally recognized at the time the product master or first copy is delivered or transferred to and accepted by the customer. If uncertainty exists regarding customer acceptance of the product or service, revenue is not recognized until acceptance occurs. Software maintenance revenue is recognized ratably over the annual maintenance period. Revenue from professional services rendered is generally recognized as the services are performed. A large portion of annual research and data subscriptions and annual software maintenance are invoiced in the months of November, December and January.

Products and services offered within the MA segment are sold either stand-alone or together in various combinations. In instances where a multiple element arrangement includes software and non-software deliverables, revenue is allocated to the non-software deliverables and to the software deliverables, as a group, using the relative selling prices of each of the deliverables in the arrangement based on the aforementioned selling price hierarchy. Revenue is recognized for each element based upon the conditions for revenue recognition noted above.

 If the arrangement contains more than one software deliverable, the arrangement consideration allocated to the software deliverables as a group is allocated to each software deliverable using VSOE. In the instances where the Company is not able to determine VSOE for all of the deliverables of an arrangement, the Company allocates the revenue to the undelivered elements equal to its VSOE and the residual revenue to the delivered elements. If the Company is unable to determine VSOE for an undelivered element, the Company defers all revenue allocated to the software deliverables until the Company has delivered all of the elements or when VSOE has been determined for the undelivered elements. In cases where software implementation services are considered essential and VSOE of fair value exists for post-contract customer support (“PCS”), once the delivery criteria has been met on the standard software, license and service revenue is recognized on a percentage-of-completion basis as implementation services are performed, while PCS is recognized over the coverage period. If VSOE of fair value does not exist for PCS, once the delivery criteria has been met on the standard software, service revenue is recognized on a zero profit margin basis until essential services are complete, at which point total remaining arrangement revenue is then spread ratably over the remaining PCS coverage period. If VSOE does not exist for PCS at the beginning of an arrangement but is established during implementation, revenue not recognized due to the absence of VSOE will be recognized on a cumulative basis.

Accounts Receivable Allowances

Moody’s records an allowance for estimated future adjustments to customer billings as a reduction of revenue, based on historical experience and current conditions. Such amounts are reflected as additions to the accounts receivable allowance. Additionally, estimates of uncollectible accounts are recorded as bad debt expense and are reflected as additions to the accounts receivable allowance. Actual billing adjustments and uncollectible account write-offs are recorded against the allowance. Moody’s evaluates its accounts receivable allowance by reviewing and assessing historical collection and adjustment experience and the current status of customer accounts. Moody’s also considers the economic environment of the customers, both from an industry and geographic perspective, in evaluating the need for allowances. Based on its analysis, Moody’s adjusts its allowance as considered appropriate in the circumstances.

Contingencies

Moody’s is involved in legal and tax proceedings, governmental, regulatory and legislative investigations and inquiries, claims and litigation that are incidental to the Company’s business, including claims based on ratings assigned by MIS. Moody’s is also subject to ongoing tax audits in the normal course of business. Management periodically assesses the Company’s liabilities and contingencies in connection with these matters based upon the latest information available. Moody’s discloses material pending legal proceedings pursuant to SEC rules and other pending matters as it may determine to be appropriate.

For claims, litigation and proceedings and governmental investigations and inquires not related to income taxes, where it is both probable that a liability has been incurred and the amount of loss can be reasonably estimated, the Company records liabilities in the consolidated financial statements and periodically adjusts these as appropriate. When the reasonable estimate of the loss is within a range of amounts, the minimum amount of the range is accrued unless some higher amount within the range is a better estimate than another amount within the range. In other instances, where a loss is reasonably possible, management may not record a liability because of uncertainties related to the probable outcome and/or the amount or range of loss, but discloses the contingency if significant. As additional information becomes available, the Company adjusts its assessments and estimates of such matters accordingly. In view of the inherent difficulty of predicting the outcome of litigation, regulatory, governmental investigations and inquiries, enforcement and similar matters, particularly where the claimants seek large or indeterminate damages or where the parties assert novel legal theories or the matters involve a large number of parties, the Company cannot predict what the eventual outcome of the pending matters will be or the timing of any resolution of such matters. The Company also cannot predict the impact (if any) that any such matters may have on how its business is conducted, on its competitive position or on its financial position, results of operations or cash flows. As the process to resolve any pending matters progresses, management will continue to review the latest information available and assess its ability to predict the outcome of such matters and the effects, if any, on its operations and financial condition. However, in light of the large or indeterminate damages sought in some of them, the absence of similar court rulings on the theories of law asserted and uncertainties regarding apportionment of any potential damages, an estimate of the range of possible losses cannot be made at this time.

The Company’s wholly-owned insurance subsidiary insures the Company against certain risks including but not limited to deductibles for worker’s compensation, employment practices litigation and employee medical claims and terrorism, for which the claims are not material to the Company. In addition, for claim years 2008 and 2009, the insurance subsidiary insured the Company for defense costs related to professional liability claims. For matters insured by the Company’s insurance subsidiary, Moody’s records liabilities based on the estimated total claims expected to be paid and total projected costs to defend a claim through its anticipated conclusion. The Company determines liabilities based on an assessment of management’s best estimate of claims to be paid and legal defense costs as well as actuarially determined estimates. Defense costs for matters not self-insured by the Company’s wholly-owned insurance subsidiary are expensed as services are provided.

For income tax matters, the Company employs the prescribed methodology of Topic 740 of the ASC which requires a company to first determine whether it is more-likely-than-not (defined as a likelihood of more than fifty percent) that a tax position will be sustained based on its technical merits as of the reporting date, assuming that taxing authorities will examine the position and have full knowledge of all relevant information. A tax position that meets this more-likely-than-not threshold is then measured and recognized at the largest amount of benefit that is greater than fifty percent likely to be realized upon effective settlement with a taxing authority.

Operating Expenses

Operating expenses include costs associated with the development and production of the Company’s products and services and their delivery to customers. These expenses principally include employee compensation and benefits and travel costs that are incurred in connection with these activities. Operating expenses are charged to income as incurred, except for certain costs related to software implementation services which may be deferred until related revenue is recognized. Additionally, certain costs incurred to develop internal use software are capitalized and depreciated over their estimated useful life.

Selling, General and Administrative Expenses

SG&A expenses include such items as compensation and benefits for corporate officers and staff and compensation and other expenses related to sales. They also include items such as office rent, business insurance, professional fees and gains and losses from sales and disposals of assets. SG&A expenses are charged to income as incurred, except for certain expenses incurred to develop internal use software (which are capitalized and depreciated over their estimated useful life) and the deferral of sales commissions in the MA segment (which are recognized in the period in which the related revenue is recognized).

Foreign Currency Translation

For all operations outside the U.S. where the Company has designated the local currency as the functional currency, assets and liabilities are translated into U.S. dollars using end of year exchange rates, and revenue and expenses are translated using average exchange rates for the year. For these foreign operations, currency translation adjustments are recorded to other comprehensive income.

Comprehensive Income

Comprehensive income represents the change in net assets of a business enterprise during a period due to transactions and other events and circumstances from non-owner sources including foreign currency translation impacts, net actuarial losses and net prior service costs related to pension and other retirement plans, gains and losses on derivative instruments designated as net investment hedges or cash flow hedges and unrealized gains and losses on securities designated as ‘available-for-sale’ under Topic 320 of the ASC. Comprehensive income items, including cumulative translation adjustments of entities that are less-than-wholly-owned subsidiaries, will be reclassified to noncontrolling interests and thereby, adjusting accumulated other comprehensive income proportionately in accordance with the percentage of ownership interest of the NCI shareholder.

Income Taxes

The Company accounts for income taxes under the asset and liability method in accordance with ASC Topic 740. Therefore, income tax expense is based on reported income before income taxes and deferred income taxes reflect the effect of temporary differences between the amounts of assets and liabilities that are recognized for financial reporting purposes and the amounts that are recognized for income tax purposes. On January 1, 2017, the Company adopted ASU No. 2016-16, “ Accounting for Income Taxes, Intra-Entity Asset Transfers of Assets Other than Inventory. Under previous guidance, the tax effects of intra-entity asset transfers (intercompany sales) were deferred until the transferred asset was sold to a third party or otherwise recovered through use. The new guidance eliminates the exception for all intra-entity sales of assets other than inventory. Upon adoption, a $4.6 million cumulative-effect adjustment was recorded in retained earnings as of the beginning of the period of adoption.

The Company classifies interest related to unrecognized tax benefits as a component of interest expense in its consolidated statements of operations. Penalties are recognized in other non-operating expenses. For uncertain tax positions (“UTPs”), the Company first determines whether it is more-likely-than-not (defined as a likelihood of more than fifty percent) that a tax position will be sustained based on its technical merits as of the reporting date, assuming that taxing authorities will examine the position and have full knowledge of all relevant information. A tax position that meets this more-likely-than-not threshold is then measured and recognized at the largest amount of benefit that is greater than fifty percent likely to be realized upon effective settlement with a taxing authority.

On December 22, 2017, the Tax Act was signed into law, resulting in all previously undistributed foreign earnings being subject to U.S. tax. However, the Company currently intends to continue to indefinitely reinvest these earnings outside the U.S. The Company has not provided non-U.S. deferred income taxes on these indefinitely reinvested earnings. It is not practicable to determine the amount of non-U.S. deferred taxes that might be required to be provided if such earnings were distributed in the future, due to complexities in the tax laws and in the hypothetical calculations that would have to be made.

Fair Value of Financial Instruments

The Company’s financial instruments include cash, cash equivalents, trade receivables and payables, all of which are short-term in nature and, accordingly, approximate fair value. Additionally, the Company invests in certain short-term investments consisting primarily of certificates of deposit that are carried at cost, which approximates fair value due to their short-term maturities.

The Company also has certain investments in closed-ended and open-ended mutual funds in India which are designated as ‘available for sale’ under Topic 320 of the ASC. Accordingly, unrealized gains and losses on these investments are recorded to other comprehensive income and are reclassified out of accumulated other comprehensive income to the statement of operations when the investment matures or is sold using a specific identification method.

Also, the Company uses derivative instruments, as further described in Note 5, to manage certain financial exposures that occur in the normal course of business. These derivative instruments are carried at fair value on the Company’s consolidated balance sheets.

Fair value is defined by the ASC as the price that would be received from selling an asset or paid to transfer a liability (i.e., an exit price) in an orderly transaction between market participants at the measurement date. The determination of this fair value is based on the principal or most advantageous market in which the Company could commence transactions and considers assumptions that market participants would use when pricing the asset or liability, such as inherent risk, transfer restrictions and risk of nonperformance. Also, determination of fair value assumes that market participants will consider the highest and best use of the asset.

The ASC establishes a fair value hierarchy whereby the inputs contained in valuation techniques used to measure fair value are categorized into three broad levels as follows:

Level 1 : quoted market prices in active markets that the reporting entity has the ability to access at the date of the fair value measurement;

Level 2 : inputs other than quoted market prices described in Level 1 that are observable for the asset or liability, either directly or indirectly, such as quoted prices in active markets for similar assets or liabilities, quoted prices for identical or similar assets or liabilities in markets that are not active or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities;

Level 3 : unobservable inputs that are supported by little or no market activity and that are significant to the fair value measurement of the assets or liabilities.

Concentration of Credit Risk

Financial instruments that potentially subject the Company to concentration of credit risk principally consist of cash and cash equivalents, short-term investments, trade receivables and derivatives.

The Company manages its credit risk exposure by allocating its cash equivalents among various money market mutual funds, money market deposit accounts, certificates of deposits and high-grade commercial paper. Short-term investments primarily consist of certificates of deposit as of December 31, 2017 and 2016. The Company manages its credit risk exposure on cash equivalents and short-term investments by limiting the amount it can invest with any single entity. No customer accounted for 10% or more of accounts receivable at December 31, 2017 or 2016.

Earnings (Loss) per Share of Common Stock

Basic shares outstanding is calculated based on the weighted average number of shares of common stock outstanding during the reporting period. Diluted shares outstanding is calculated giving effect to all potentially dilutive common shares, assuming that such shares were outstanding and dilutive during the reporting period.

Pension and Other Retirement Benefits

Moody’s maintains various noncontributory DBPPs as well as other contributory and noncontributory retirement plans. The expense and assets/liabilities that the Company reports for its pension and other retirement benefits are dependent on many assumptions concerning the outcome of future events and circumstances. These assumptions represent the Company’s best estimates and may vary by plan. The differences between the assumptions for the expected long-term rate of return on plan assets and actual experience is spread over a five-year period to the market-related value of plan assets which is used in determining the expected return on assets component of annual pension expense. All other actuarial gains and losses are generally deferred and amortized over the estimated average future working life of active plan participants.

The Company recognizes as an asset or liability in its consolidated balance sheet the funded status of its defined benefit retirement plans, measured on a plan-by-plan basis. Changes in the funded status due to actuarial gains/losses are recorded as part of other comprehensive income during the period the changes occur.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the period. Actual results could differ from those estimates. Estimates are used for, but not limited to, revenue recognition, accounts receivable allowances, income taxes, contingencies, valuation and useful lives of long-lived and intangible assets, goodwill, pension and other retirement benefits, stock-based compensation, and depreciable lives for property and equipment and computer software.

Recently Issued Accounting Pronouncements

In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606)”. This ASU outlines a comprehensive new revenue recognition model that requires a company to recognize revenue to depict the transfer of goods or services to a customer at an amount that reflects the consideration it expects to receive in exchange for those goods or services by performing a five-step process. In August 2015, the FASB issued ASU No. 2015-14 “Revenue from Contracts with Customers (Topic 606), Deferral of the Effective Date” which defers the effective date of the ASU for annual and interim reporting periods beginning after December 15, 2017, with early adoption permitted up to the original effective date of December 15, 2016. In addition, during 2016, the FASB issued additional updates clarifying the implementation guidance for the new revenue recognition standard.

The Company will adopt the new revenue guidance as of January 1, 2018 using the modified retrospective transition method. Under this adoption method, the Company will record a cumulative adjustment to retained earnings at January 1, 2018 and apply the provisions of the ASU prospectively. As of the date of this filing, the Company has made a full assessment of the changes to its accounting policies relating to the adoption of the new revenue accounting standard. This ASU will have an impact on, which is not limited to: i) the accounting for certain software subscription revenue in MA whereby the license rights within the arrangement will be recognized at the inception of the contract based on estimated stand-alone selling price with the remainder recognized over the subscription period (compared to ASC 605 whereby all software subscription revenue is currently recognized over the subscription period); ii) the accounting for certain ERS and ESA revenue arrangements where VSOE is not currently available under ASC 605 will result in the acceleration of revenue recognition (compared to ASC 605 whereby revenue is currently deferred due to lack of VSOE until all elements without VSOE have been delivered); iii) the capitalization and related amortization period for sales commissions, which are incurred in the MA segment; iv) the expensing of software implementation project costs to fulfill a contract for its ERS and ESA businesses which under ASC 605 were capitalized and expensed when related project revenue was recognized; v) the capitalization of work-in-process costs for in-progress MIS ratings at the end of each reporting period; and vi) the timing of when fees for certain MIS ratings products are recognized to match when the performance obligation to the customer is satisfied and the determination of the transaction price to account for variable consideration at contract inception. This ASU will also require new comprehensive disclosures about contracts with customers including the significant reasonable judgments the Company has made when applying the ASU.

The Company is in the process of finalizing the implementation of a software solution in order to support the accounting under the new standard for MA revenue arrangements with multiple performance obligations.

Under this adoption method, the Company will record a cumulative non-cash adjustment to retained earnings at January 1, 2018 and apply the provisions of the ASU prospectively. The table below reflects an approximation of anticipated impacts to January 1, 2018 retained earnings for each type of adjustment required under the new revenue standard based on the Company’s assessment and best estimates to date.

Transition adjustment Estimated benefit to / (reduction of) January 1, 2018 Retained Earnings
Recognition of MA deferred revenue(1)Approximately $105 million
Increase to capitalized MA sales commissions(2)Approximately $76 million
Net impact of all other adjustmentsApproximately $4 million
Capitalization of work-in-process for in-progress ratingsApproximately $9 million
Net increase in tax liability on the above(Approximately $45 million)
Total anticipated post-tax adjustmentApproximately $149 million
(1) Represents anticipated deferred revenue as of December 31, 2017 that would have been recognized as revenue in 2017 or earlier if the new standard was then in effect. The transition adjustment will continue to be refined as the Company finalizes its implementation of the aforementioned software solution.
(2) Pending finalization of the final fourth quarter MA sales commission payout to be made during the first quarter.

Note that the above range of expected impacts from adopting the new revenue standard pertains solely to the impact to retained earnings as of January 1, 2018 on the Company’s consolidated balance sheet, and is not indicative of the impact the new ASU is expected to have on the Company’s consolidated statement of operations post-adoption. The impact that the provisions of the new ASU will have on the consolidated statement of operations subsequent to adoption will depend heavily on the volume and impact of new sales contracts realized in future periods, particularly in the ERS and ESA businesses. The Company does not have any material software implementation arrangements in progress as of December 31, 2017 with terms longer than two years, and therefore the impact to the consolidated statement of operations under the provisions of the new standard will be dependent on each future period’s sales activity. Generally, however, the Company does not anticipate that applying the provisions of the new standard will have a material impact to its 2018 consolidated Net Income. However, there could be quarterly fluctuations in the financial results of both MIS and MA, or there could be increases or decreases in revenues and expenses which would largely offset and not be material at a total Company level for the full year. Furthermore, as part of the disclosure requirements in the first year of adoption, there will be disclosures of the Company’s consolidated statement of operations for 2018 as if the new revenue standard was not adopted and the Company continued to account for revenue and related transactions under the existing standards. Importantly, the application of this new guidance has no effect on the cash the Company expects to receive nor on the economics of the business, but rather affects the timing of revenue and expense recognition with the expectation that revenue recognition will more closely align with cash received.

In January 2016, the FASB issued ASU No. 2016-01 “Financial Instruments – Overall (Subtopic 825-10), Recognition and Measurement of Financial Assets and Financial Liabilities”. The amendments in this ASU update various aspects of recognition, measurement, presentation and disclosures relating to financial instruments. This ASU is effective for fiscal years beginning after December 15, 2017. The Company has determined that the most pertinent impact to its financial statements upon the adoption of this ASU will relate to the discontinuance of the available-for-sale classification for investments in equity securities (unrealized gains and losses were recorded through OCI). Accordingly, subsequent to adoption of this ASU, changes in the fair value of equity securities held by the Company will be recorded through earnings. The Company does not expect the adoption of this ASU to have a material impact on its financial statements.

In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842)” requiring lessees to recognize a right-of-use asset and lease liability for all leases with terms of more than 12 months. Recognition, measurement and presentation of expenses and cash flows will depend on classification as either a finance or operating lease. This ASU is effective for fiscal years beginning after December 15, 2018, with early adoption permitted. This standard must be adopted using a modified retrospective approach whereby leases will be presented in accordance with the new standard as of the earliest period presented. The Company is currently evaluating the impact of this ASU on the Company’s financial statements. The Company believes that the most notable impact to its financial statements upon the adoption of this ASU will be the recognition of a material right-of-use asset and lease liability for its real estate leases.

In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments – Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments”. The amendments in this ASU require the use of an “expected credit loss” impairment model for most financial assets reported at amortized cost which will require entities to estimate expected credit losses over the lifetime of the instrument. This may result in the earlier recognition of allowances for losses. For available-for-sale debt securities with unrealized losses, an allowance for credit losses will be recognized as a contra account to the amortized cost carrying value of the asset rather than a direct reduction to the carrying value, with changes in the allowance impacting earnings. This ASU is effective for annual and interim reporting periods beginning after December 15, 2019, with early adoption permitted in annual and interim reporting periods beginning after December 15, 2018. Entities will apply the standard’s provisions as a cumulative-effect adjustment to retained earnings as of the beginning of the first effective reporting period. The Company is currently evaluating the impact of this ASU on its financial statements. Currently, the Company believes that the most notable impact of this ASU will relate to its processes around the assessment of the adequacy of its allowance for doubtful accounts on accounts receivable.

 

In August 2016, the FASB issued ASU No. 2016-15, “Statement of Cash Flows (Topic 230), Classification of Certain Cash Receipts and Cash Payments”. This ASU adds or clarifies guidance on the classification of certain cash receipts and payments in the statement of cash flows with the intent to alleviate diversity in practice for classifying various types of cash flows. This ASU is effective for annual and interim reporting periods beginning after December 15, 2017. The Company will apply this clarification guidance in its statements of cash flows upon adoption.

In January 2017, the FASB issued ASU No. 2017-01, “Business Combinations (Topic 805), Clarifying the Definition of a Business”. This ASU clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. This ASU is effective for annual and interim reporting periods beginning after December 15, 2017 and should be applied prospectively. Upon adoption, the Company will apply the guidance in this ASU when evaluating whether acquired assets and activities constitute a business.

In March 2017, the FASB issued ASU No. 2017-07, “Compensation – Retirement Benefits (Topic 715), Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost”. This ASU impacts the presentation of net periodic pension costs in the statement of operations. Entities will be required to report the service cost component in the same line item or items as other compensation costs (either Operating or SG&A in Moody’s statement of operations). The other components of net benefit cost are required to be presented in the statement of operations separately from the service cost component and outside of operating income. The ASU permits only the service cost component of net periodic pension cost to be eligible for capitalization, when applicable. This ASU is effective for annual and interim reporting periods beginning after December 15, 2017. Upon adoption, the Company will bifurcate its net periodic pension costs reported in its statements of operations in accordance with this ASU.

In May 2017, the FASB issued ASU No. 2017-09, “Compensation—Stock Compensation (Topic 718), Scope of Modification Accounting”. This ASU clarifies when changes to the terms or conditions of a share-based payment award must be accounted for as modifications. Under this ASU, an entity will not apply modification accounting to a share-based payment award if the award’s fair value, vesting conditions and classification as an equity or liability instrument are the same immediately before and after the change. The new guidance will reduce diversity in practice and result in fewer changes to the terms of an award being accounted for as modifications. This ASU is effective for annual and interim reporting periods beginning after December 15, 2017 and should be applied prospectively to awards modified on or after the adoption date. The Company does not expect the adoption of this ASU to have a material impact on its financial statements.

In July 2017, the FASB issued ASU No. 2017-12, “Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities”. This ASU enables entities to enhance transparency relating to risk management activities and simplifies the application of hedge accounting in certain circumstances. This ASU is effective for fiscal years beginning after December 15, 2018, including interim periods within those years with early adoption permitted. The Company is currently in the process of assessing the impact that this ASU will have on its financial statements.

In December 2017, the SEC issued Staff Accounting Bulletin No. 118 ("SAB 118") to address the application of U.S. GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to finalize the calculations for the 2017 income tax effects of the Tax Act. SAB 118 provides entities with a measurement period from the December 22, 2017 enactment date, in order to complete the accounting for the effects of the Tax Act. Further information pertaining to the provisional estimates recorded by the Company as of and for the year ended December 31, 2017 are detailed in Note 15 to the consolidated financial statements.

In February 2018, FASB issued ASU 2018-02, “Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income”. Under current GAAP, adjustments to deferred tax assets and liabilities related to a change in tax laws or rates are included in income from continuing operations, even in situations where the related items were originally recognized in OCI (commonly referred to as a “stranded tax effect”). The provisions of this ASU permit the reclassification of the stranded tax effect related to the Tax Act from AOCI to retained earnings. This ASU is effective for all entities for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years, with early adoption permitted. Adoption of this ASU is to be applied either in the period of adoption or retrospectively to each period in which the effect of the Tax Act were recognized. The Company is currently evaluating the impact of this ASU on its financial statements.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Policies)

Basis of Consolidation

The consolidated financial statements include those of Moody’s Corporation and its majority- and wholly-owned subsidiaries. The effects of all intercompany transactions have been eliminated. Investments in companies for which the Company has significant influence over operating and financial policies but not a controlling interest are accounted for on an equity basis whereby the Company records its proportional share of the investment’s net income or loss as part of other non-operating income (expense), net and any dividends received reduce the carrying amount of the investment. The Company applies the guidelines set forth in Topic 810 of the ASC in assessing its interests in variable interest entities to decide whether to consolidate that entity. The Company has reviewed the potential variable interest entities and determined that there are no consolidation requirements under Topic 810 of the ASC. The Company consolidates its ICRA subsidiaries on a three month lag.

Cash and Cash Equivalents

Cash equivalents principally consist of investments in money market mutual funds and money market deposit accounts as well as high-grade commercial paper and certificates of deposit with maturities of three months or less when purchased.

Short-term Investments

Short-term investments are securities with maturities greater than 90 days at the time of purchase that are available for operations in the next 12 months. The Company’s short-term investments primarily consist of certificates of deposit and their cost approximates fair value due to the short-term nature of the instruments. Interest and dividends on these investments are recorded into income when earned.

Property and Equipment

Property and equipment are stated at cost and are depreciated using the straight-line method over their estimated useful lives. Expenditures for maintenance and repairs that do not extend the economic useful life of the related assets are charged to expense as incurred.

Research and Development Costs

All research and development costs are expensed as incurred. These costs primarily reflect the development of credit processing software and quantitative credit risk assessment products sold by the MA segment.

Research and development costs were $42.0 million, $40.1 million, and $29.1 million for the years ended December 31, 2017, 2016 and 2015, respectively, and are included in operating expenses within the Company’s consolidated statements of operations. These costs generally consist of professional services provided by third parties and compensation costs of employees.

Costs for internally developed computer software that will be sold, leased or otherwise marketed are capitalized when technological feasibility has been established. These costs primarily relate to the development or enhancement of products in the ERS business and generally consist of professional services provided by third parties and compensation costs of employees that develop the software. Judgment is required in determining when technological feasibility of a product is established and the Company believes that technological feasibility for its software products is reached after all high-risk development issues have been resolved through coding and testing. Generally, this occurs shortly before the products are released to customers. Accordingly, costs for internally developed computer software that will be sold, leased or otherwise marketed that were eligible for capitalization under Topic 985 of the ASC were immaterial for the years ended December 31, 2017, 2016 and 2015.

Computer Software Developed or Obtained for Internal Use

The Company capitalizes costs related to software developed or obtained for internal use. These assets, included in property and equipment in the consolidated balance sheets, relate to the Company’s financial, website and other systems. Such costs generally consist of direct costs for third-party license fees, professional services provided by third parties and employee compensation, in each case incurred either during the application development stage or in connection with upgrades and enhancements that increase functionality. Such costs are depreciated over their estimated useful lives on a straight-line basis. Costs incurred during the preliminary project stage of development as well as maintenance costs are expensed as incurred.

Long-Lived Assets, Including Goodwill and Other Acquired Intangible Assets

Moody’s evaluates its goodwill for impairment at the reporting unit level, defined as an operating segment or one level below an operating segment, annually as of July 31 or more frequently if impairment indicators arise in accordance with ASC Topic 350.

The Company evaluates the recoverability of goodwill using a two-step impairment test approach at the reporting unit level. In the first step, the Company assesses various qualitative factors to determine whether the fair value of a reporting unit may be less than its carrying amount. If a determination is made that, based on the qualitative factors, an impairment does not exist, the Company is not required to perform further testing. If the aforementioned qualitative assessment results in the Company concluding that it is more likely than not that the fair value of a reporting unit may be less than its carrying amount, the fair value of the reporting unit will be determined and compared to its carrying value including goodwill. If the fair value of the reporting unit exceeds the carrying value of the net assets assigned to that unit, goodwill is not impaired and the Company is not required to perform further testing. If the fair value of the reporting unit is less than the carrying value, the Company will recognize the difference as an impairment charge.

The Company evaluates its reporting units for impairment on an annual basis, or more frequently if there are changes in the reporting structure of the Company due to acquisitions or realignments or if there are indicators of potential impairment. For the reporting units where the Company is consistently able to conclude that an impairment does not exist using only a qualitative approach, the Company’s accounting policy is to perform the second step of the aforementioned goodwill impairment assessment at least once every three years. Goodwill is assigned to a reporting unit at the date when an acquisition is integrated into one of the established reporting units, and is based on which reporting unit is expected to benefit from the synergies of the acquisition.

For purposes of assessing the recoverability of goodwill, the Company has seven primary reporting units at December 31, 2017: two within the Company’s ratings business (one for the ICRA business and one that encompasses all of Moody’s other ratings operations) and five reporting units within MA: RD&A, ERS, FSTC, MAKS and Bureau van Dijk. The RD&A reporting unit encompasses the distribution of investor-oriented research and data developed by MIS as part of its ratings process, in-depth research on major debt issuers, industry studies, economic research and commentary on topical events and credit analytic tools. The ERS reporting unit consists of credit risk management and compliance software that is sold on a license or subscription basis as well as related advisory services for implementation and maintenance. The FSTC reporting unit consists of the portion of the MA business that offers both credit training as well as other professional development training and certification services. The MAKS reporting unit consists of offshore research and analytical services. The Bureau van Dijk reporting unit consists of business intelligence and company information products.

Amortizable intangible assets are reviewed for recoverability whenever events or changes in circumstances indicate that the carrying amount may not be recoverable.

Rent Expense

The Company records rent expense on a straight-line basis over the life of the lease. In cases where there is a free rent period or future fixed rent escalations the Company will record a deferred rent liability. Additionally, the receipt of any lease incentives will be recorded as a deferred rent liability which will be amortized over the lease term as a reduction of rent expense.

Stock-Based Compensation

The Company records compensation expense for all share-based payment award transactions granted to employees based on the fair value of the equity instrument at the time of grant. This includes shares issued under stock option and restricted stock plans.

Derivative Instruments and Hedging Activities

Based on the Company’s risk management policy, from time to time the Company may use derivative financial instruments to reduce exposure to changes in foreign exchange rates and interest rates. The Company does not enter into derivative financial instruments for speculative purposes. All derivative financial instruments are recorded on the balance sheet at their respective fair values. The changes in the value of derivatives that qualify as fair value hedges are recorded with a corresponding adjustment to the carrying value of the item being hedged. Changes in the derivative’s fair value that qualify as cash flow hedges are recorded to other comprehensive income or loss, to the extent the hedge is effective, and such amounts are reclassified from accumulated other comprehensive income or loss to earnings in the same period or periods during which the hedged transaction affects income. Changes in the derivative’s fair value that qualify as net investment hedges are recorded to other comprehensive income or loss, to the extent the hedge is effective. Any changes in the fair value of derivatives that the Company does not designate as hedging instruments under Topic 815 of the ASC are recorded in the consolidated statements of operations in the period in which they occur.

Revenue Recognition

Revenue is recognized when persuasive evidence of an arrangement exists, delivery has occurred or the services have been provided and accepted by the customer when applicable, fees are determinable and the collection of resulting receivables is considered probable.

Pursuant to ASC Topic 605, when a sales arrangement contains multiple deliverables, the Company allocates revenue to each deliverable based on its relative selling price which is determined based on its vendor specific objective evidence if available, third party evidence if VSOE is not available, or estimated selling price if neither VSOE nor TPE is available.

The Company’s products and services will generally qualify as separate units of accounting under ASC Topic 605. The Company evaluates each deliverable in an arrangement to determine whether it represents a separate unit of accounting. A deliverable constitutes a separate unit of accounting when it has stand-alone value to the customers and if the arrangement includes a customer refund or return right relative to the delivered item and the delivery and performance of the undelivered item is considered probable and substantially in the Company’s control. In instances where the aforementioned criteria are not met, the deliverable is combined with the undelivered items and revenue recognition is determined as one single unit.

The Company determines whether its selling price in a multi-element transaction meets the VSOE criteria by using the price charged for a deliverable when sold separately or, if the deliverable is not yet being sold separately, the price established by management having the relevant authority to establish such a price. In instances where the Company is not able to establish VSOE for all deliverables in a multiple element arrangement, which may be due to the Company infrequently selling each element separately, not selling products within a reasonably narrow price range, or only having a limited sales history, the Company attempts to establish TPE for deliverables. The Company determines whether TPE exists by evaluating largely similar and interchangeable competitor products or services in standalone sales to similarly situated customers. However, due to the difficulty in obtaining third party pricing, possible differences in its market strategy from that of its peers and the potential that products and services offered by the Company may contain a significant level of differentiation and/or customization such that the comparable pricing of products with similar functionality cannot be obtained, the Company generally is unable to reliably determine TPE. Based on the selling price hierarchy established by ASC Topic 605, when the Company is unable to establish selling price using VSOE or TPE, the Company will establish an ESP. ESP is the price at which the Company would transact a sale if the product or service were sold on a stand-alone basis. The Company establishes its best estimate of ESP considering internal factors relevant to is pricing practices such as costs and margin objectives, standalone sales prices of similar products, percentage of the fee charged for a primary product or service relative to a related product or service, and customer segment and geography. Additional consideration is also given to market conditions such as competitor pricing strategies and market trend. The Company reviews its determination of VSOE, TPE and ESP on an annual basis or more frequently as needed.

In the MIS segment, revenue attributed to initial ratings of issued securities is recognized when the rating is delivered to the issuer. Revenue attributed to monitoring of issuers or issued securities is recognized ratably over the period in which the monitoring is performed, generally one year. In the case of commercial mortgage-backed securities, structured credit, international residential mortgage-backed and asset-backed securities, issuers can elect to pay the monitoring fees upfront. These fees are deferred and recognized over the future monitoring periods based on the expected lives of the rated securities, which was approximately 24 years on a weighted average basis at December 31, 2017. At December 31, 2017, 2016 and 2015, deferred revenue related to these securities was approximately $140.1 million, $133.0 million, and $121.0 million, respectively.

Multiple element revenue arrangements in the MIS segment are generally comprised of an initial rating and the related monitoring service. In instances where monitoring fees are not charged for the first year monitoring effort, fees are allocated to the initial rating and monitoring services based on the relative selling price of each service to the total arrangement fees. The Company generally uses ESP in determining the selling price for its initial ratings as the Company rarely provides initial ratings separately without providing related monitoring services and thus is unable to establish VSOE or TPE for initial ratings.

MIS estimates revenue for ratings of commercial paper for which, in addition to a fixed annual monitoring fee, issuers are billed quarterly based on amounts outstanding. Revenue is accrued each quarter based on estimated amounts outstanding and is billed when actual data is available. The estimate is determined based on the issuers’ most recent reported quarterly data. At December 31, 2017, 2016 and 2015, accounts receivable included approximately $27.0 million, $25.0 million, and $24.0 million, respectively, related to accrued commercial paper revenue. Historically, MIS has not had material differences between the estimated revenue and the actual billings. Furthermore, for certain annual monitoring services, fees are not invoiced until the end of the annual monitoring period and revenue is accrued ratably over the monitoring period. At December 31, 2017, 2016, and 2015, accounts receivable included approximately $185.0 million, $159.1 million, and $146.4 million, respectively, relating to accrued annual monitoring service revenue.

In the MA segment, products and services offered by the Company include software licenses and related maintenance, subscriptions, and professional services. Revenue from subscription based products, such as research and data subscriptions and certain software-based credit risk management subscription products, is recognized ratably over the related subscription period, which is principally one year. Revenue from sale of perpetual licenses of credit processing software is generally recognized at the time the product master or first copy is delivered or transferred to and accepted by the customer. If uncertainty exists regarding customer acceptance of the product or service, revenue is not recognized until acceptance occurs. Software maintenance revenue is recognized ratably over the annual maintenance period. Revenue from professional services rendered is generally recognized as the services are performed. A large portion of annual research and data subscriptions and annual software maintenance are invoiced in the months of November, December and January.

Products and services offered within the MA segment are sold either stand-alone or together in various combinations. In instances where a multiple element arrangement includes software and non-software deliverables, revenue is allocated to the non-software deliverables and to the software deliverables, as a group, using the relative selling prices of each of the deliverables in the arrangement based on the aforementioned selling price hierarchy. Revenue is recognized for each element based upon the conditions for revenue recognition noted above.

 If the arrangement contains more than one software deliverable, the arrangement consideration allocated to the software deliverables as a group is allocated to each software deliverable using VSOE. In the instances where the Company is not able to determine VSOE for all of the deliverables of an arrangement, the Company allocates the revenue to the undelivered elements equal to its VSOE and the residual revenue to the delivered elements. If the Company is unable to determine VSOE for an undelivered element, the Company defers all revenue allocated to the software deliverables until the Company has delivered all of the elements or when VSOE has been determined for the undelivered elements. In cases where software implementation services are considered essential and VSOE of fair value exists for post-contract customer support (“PCS”), once the delivery criteria has been met on the standard software, license and service revenue is recognized on a percentage-of-completion basis as implementation services are performed, while PCS is recognized over the coverage period. If VSOE of fair value does not exist for PCS, once the delivery criteria has been met on the standard software, service revenue is recognized on a zero profit margin basis until essential services are complete, at which point total remaining arrangement revenue is then spread ratably over the remaining PCS coverage period. If VSOE does not exist for PCS at the beginning of an arrangement but is established during implementation, revenue not recognized due to the absence of VSOE will be recognized on a cumulative basis.

Accounts Receivable Allowances

Moody’s records an allowance for estimated future adjustments to customer billings as a reduction of revenue, based on historical experience and current conditions. Such amounts are reflected as additions to the accounts receivable allowance. Additionally, estimates of uncollectible accounts are recorded as bad debt expense and are reflected as additions to the accounts receivable allowance. Actual billing adjustments and uncollectible account write-offs are recorded against the allowance. Moody’s evaluates its accounts receivable allowance by reviewing and assessing historical collection and adjustment experience and the current status of customer accounts. Moody’s also considers the economic environment of the customers, both from an industry and geographic perspective, in evaluating the need for allowances. Based on its analysis, Moody’s adjusts its allowance as considered appropriate in the circumstances.

Contingencies

Moody’s is involved in legal and tax proceedings, governmental, regulatory and legislative investigations and inquiries, claims and litigation that are incidental to the Company’s business, including claims based on ratings assigned by MIS. Moody’s is also subject to ongoing tax audits in the normal course of business. Management periodically assesses the Company’s liabilities and contingencies in connection with these matters based upon the latest information available. Moody’s discloses material pending legal proceedings pursuant to SEC rules and other pending matters as it may determine to be appropriate.

For claims, litigation and proceedings and governmental investigations and inquires not related to income taxes, where it is both probable that a liability has been incurred and the amount of loss can be reasonably estimated, the Company records liabilities in the consolidated financial statements and periodically adjusts these as appropriate. When the reasonable estimate of the loss is within a range of amounts, the minimum amount of the range is accrued unless some higher amount within the range is a better estimate than another amount within the range. In other instances, where a loss is reasonably possible, management may not record a liability because of uncertainties related to the probable outcome and/or the amount or range of loss, but discloses the contingency if significant. As additional information becomes available, the Company adjusts its assessments and estimates of such matters accordingly. In view of the inherent difficulty of predicting the outcome of litigation, regulatory, governmental investigations and inquiries, enforcement and similar matters, particularly where the claimants seek large or indeterminate damages or where the parties assert novel legal theories or the matters involve a large number of parties, the Company cannot predict what the eventual outcome of the pending matters will be or the timing of any resolution of such matters. The Company also cannot predict the impact (if any) that any such matters may have on how its business is conducted, on its competitive position or on its financial position, results of operations or cash flows. As the process to resolve any pending matters progresses, management will continue to review the latest information available and assess its ability to predict the outcome of such matters and the effects, if any, on its operations and financial condition. However, in light of the large or indeterminate damages sought in some of them, the absence of similar court rulings on the theories of law asserted and uncertainties regarding apportionment of any potential damages, an estimate of the range of possible losses cannot be made at this time.

The Company’s wholly-owned insurance subsidiary insures the Company against certain risks including but not limited to deductibles for worker’s compensation, employment practices litigation and employee medical claims and terrorism, for which the claims are not material to the Company. In addition, for claim years 2008 and 2009, the insurance subsidiary insured the Company for defense costs related to professional liability claims. For matters insured by the Company’s insurance subsidiary, Moody’s records liabilities based on the estimated total claims expected to be paid and total projected costs to defend a claim through its anticipated conclusion. The Company determines liabilities based on an assessment of management’s best estimate of claims to be paid and legal defense costs as well as actuarially determined estimates. Defense costs for matters not self-insured by the Company’s wholly-owned insurance subsidiary are expensed as services are provided.

For income tax matters, the Company employs the prescribed methodology of Topic 740 of the ASC which requires a company to first determine whether it is more-likely-than-not (defined as a likelihood of more than fifty percent) that a tax position will be sustained based on its technical merits as of the reporting date, assuming that taxing authorities will examine the position and have full knowledge of all relevant information. A tax position that meets this more-likely-than-not threshold is then measured and recognized at the largest amount of benefit that is greater than fifty percent likely to be realized upon effective settlement with a taxing authority.

Operating Expenses

Operating expenses include costs associated with the development and production of the Company’s products and services and their delivery to customers. These expenses principally include employee compensation and benefits and travel costs that are incurred in connection with these activities. Operating expenses are charged to income as incurred, except for certain costs related to software implementation services which may be deferred until related revenue is recognized. Additionally, certain costs incurred to develop internal use software are capitalized and depreciated over their estimated useful life.

Selling, General and Administrative Expenses

SG&A expenses include such items as compensation and benefits for corporate officers and staff and compensation and other expenses related to sales. They also include items such as office rent, business insurance, professional fees and gains and losses from sales and disposals of assets. SG&A expenses are charged to income as incurred, except for certain expenses incurred to develop internal use software (which are capitalized and depreciated over their estimated useful life) and the deferral of sales commissions in the MA segment (which are recognized in the period in which the related revenue is recognized).

Foreign Currency Translation

For all operations outside the U.S. where the Company has designated the local currency as the functional currency, assets and liabilities are translated into U.S. dollars using end of year exchange rates, and revenue and expenses are translated using average exchange rates for the year. For these foreign operations, currency translation adjustments are recorded to other comprehensive income.

Comprehensive Income

Comprehensive income represents the change in net assets of a business enterprise during a period due to transactions and other events and circumstances from non-owner sources including foreign currency translation impacts, net actuarial losses and net prior service costs related to pension and other retirement plans, gains and losses on derivative instruments designated as net investment hedges or cash flow hedges and unrealized gains and losses on securities designated as ‘available-for-sale’ under Topic 320 of the ASC. Comprehensive income items, including cumulative translation adjustments of entities that are less-than-wholly-owned subsidiaries, will be reclassified to noncontrolling interests and thereby, adjusting accumulated other comprehensive income proportionately in accordance with the percentage of ownership interest of the NCI shareholder.

Income Taxes

The Company accounts for income taxes under the asset and liability method in accordance with ASC Topic 740. Therefore, income tax expense is based on reported income before income taxes and deferred income taxes reflect the effect of temporary differences between the amounts of assets and liabilities that are recognized for financial reporting purposes and the amounts that are recognized for income tax purposes. On January 1, 2017, the Company adopted ASU No. 2016-16, “ Accounting for Income Taxes, Intra-Entity Asset Transfers of Assets Other than Inventory. Under previous guidance, the tax effects of intra-entity asset transfers (intercompany sales) were deferred until the transferred asset was sold to a third party or otherwise recovered through use. The new guidance eliminates the exception for all intra-entity sales of assets other than inventory. Upon adoption, a $4.6 million cumulative-effect adjustment was recorded in retained earnings as of the beginning of the period of adoption.

The Company classifies interest related to unrecognized tax benefits as a component of interest expense in its consolidated statements of operations. Penalties are recognized in other non-operating expenses. For uncertain tax positions (“UTPs”), the Company first determines whether it is more-likely-than-not (defined as a likelihood of more than fifty percent) that a tax position will be sustained based on its technical merits as of the reporting date, assuming that taxing authorities will examine the position and have full knowledge of all relevant information. A tax position that meets this more-likely-than-not threshold is then measured and recognized at the largest amount of benefit that is greater than fifty percent likely to be realized upon effective settlement with a taxing authority.

On December 22, 2017, the Tax Act was signed into law, resulting in all previously undistributed foreign earnings subject to U.S. tax. However, the Company currently intends to continue to indefinitely reinvest these earnings outside the U.S. The Company has not provided non-U.S. deferred income taxes on these indefinitely reinvested earnings. It is not practicable to determine the amount of non-U.S. deferred taxes that might be required to be provided if such earnings were distributed in the future, due to complexities in the tax laws and in the hypothetical calculations that would have to be made.

Fair Value of Financial Instruments

The Company’s financial instruments include cash, cash equivalents, trade receivables and payables, all of which are short-term in nature and, accordingly, approximate fair value. Additionally, the Company invests in certain short-term investments consisting primarily of certificates of deposit that are carried at cost, which approximates fair value due to their short-term maturities.

The Company also has certain investments in closed-ended and open-ended mutual funds in India which are designated as ‘available for sale’ under Topic 320 of the ASC. Accordingly, unrealized gains and losses on these investments are recorded to other comprehensive income and are reclassified out of accumulated other comprehensive income to the statement of operations when the investment matures or is sold using a specific identification method.

Also, the Company uses derivative instruments, as further described in Note 5, to manage certain financial exposures that occur in the normal course of business. These derivative instruments are carried at fair value on the Company’s consolidated balance sheets.

Fair value is defined by the ASC as the price that would be received from selling an asset or paid to transfer a liability (i.e., an exit price) in an orderly transaction between market participants at the measurement date. The determination of this fair value is based on the principal or most advantageous market in which the Company could commence transactions and considers assumptions that market participants would use when pricing the asset or liability, such as inherent risk, transfer restrictions and risk of nonperformance. Also, determination of fair value assumes that market participants will consider the highest and best use of the asset.

The ASC establishes a fair value hierarchy whereby the inputs contained in valuation techniques used to measure fair value are categorized into three broad levels as follows:

Level 1 : quoted market prices in active markets that the reporting entity has the ability to access at the date of the fair value measurement;

Level 2 : inputs other than quoted market prices described in Level 1 that are observable for the asset or liability, either directly or indirectly, such as quoted prices in active markets for similar assets or liabilities, quoted prices for identical or similar assets or liabilities in markets that are not active or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities;

Level 3 : unobservable inputs that are supported by little or no market activity and that are significant to the fair value measurement of the assets or liabilities.

Concentration of Credit Risk

Financial instruments that potentially subject the Company to concentration of credit risk principally consist of cash and cash equivalents, short-term investments, trade receivables and derivatives.

The Company manages its credit risk exposure by allocating its cash equivalents among various money market mutual funds, money market deposit accounts, certificates of deposits and high-grade commercial paper. Short-term investments primarily consist of certificates of deposit as of December 31, 2017 and 2016. The Company manages its credit risk exposure on cash equivalents and short-term investments by limiting the amount it can invest with any single entity. No customer accounted for 10% or more of accounts receivable at December 31, 2017 or 2016.

Earnings (Loss) per Share of Common Stock

Basic shares outstanding is calculated based on the weighted average number of shares of common stock outstanding during the reporting period. Diluted shares outstanding is calculated giving effect to all potentially dilutive common shares, assuming that such shares were outstanding and dilutive during the reporting period.

Pension and Other Retirement Benefits

Moody’s maintains various noncontributory DBPPs as well as other contributory and noncontributory retirement plans. The expense and assets/liabilities that the Company reports for its pension and other retirement benefits are dependent on many assumptions concerning the outcome of future events and circumstances. These assumptions represent the Company’s best estimates and may vary by plan. The differences between the assumptions for the expected long-term rate of return on plan assets and actual experience is spread over a five-year period to the market-related value of plan assets which is used in determining the expected return on assets component of annual pension expense. All other actuarial gains and losses are generally deferred and amortized over the estimated average future working life of active plan participants.

The Company recognizes as an asset or liability in its consolidated balance sheet the funded status of its defined benefit retirement plans, measured on a plan-by-plan basis. Changes in the funded status due to actuarial gains/losses are recorded as part of other comprehensive income during the period the changes occur.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the period. Actual results could differ from those estimates. Estimates are used for, but not limited to, revenue recognition, accounts receivable allowances, income taxes, contingencies, valuation and useful lives of long-lived and intangible assets, goodwill, pension and other retirement benefits, stock-based compensation, and depreciable lives for property and equipment and computer software.

Recently Issued Accounting Pronouncements

Transition adjustment Estimated benefit to / (reduction of) January 1, 2018 Retained Earnings
Recognition of MA deferred revenue(1)Approximately $105 million
Increase to capitalized MA sales commissions(2)Approximately $76 million
Net impact of all other adjustmentsApproximately $4 million
Capitalization of work-in-process for in-progress ratingsApproximately $9 million
Net increase in tax liability on the above(Approximately $45 million)
Total anticipated post-tax adjustmentApproximately $149 million
(1) Represents anticipated deferred revenue as of December 31, 2017 that would have been recognized as revenue in 2017 or earlier if the new standard was then in effect. The transition adjustment will continue to be refined as the Company finalizes its implementation of the aforementioned software solution.
(2) Pending finalization of the final fourth quarter MA sales commission payout to be made during the first quarter.

Note that the above range of expected impacts from adopting the new revenue standard pertains solely to the impact to retained earnings as of January 1, 2018 on the Company’s consolidated balance sheet, and is not indicative of the impact the new ASU is expected to have on the Company’s consolidated statement of operations post-adoption. The impact that the provisions of the new ASU will have on the consolidated statement of operations subsequent to adoption will depend heavily on the volume and impact of new sales contracts realized in future periods, particularly in the ERS and ESA businesses. The Company does not have any material software implementation arrangements in progress as of December 31, 2017 with terms longer than two years, and therefore the impact to the consolidated statement of operations under the provisions of the new standard will be dependent on each future period’s sales activity. Generally, however, the Company does not anticipate that applying the provisions of the new standard will have a material impact to its 2018 consolidated Net Income. However, there could be quarterly fluctuations in the financial results of both MIS and MA, or there could be increases or decreases in revenues and expenses which would largely offset and not be material at a total Company level for the full year. Furthermore, as part of the disclosure requirements in the first year of adoption, there will be disclosures of the Company’s consolidated statement of operations for 2018 as if the new revenue standard was not adopted and the Company continued to account for revenue and related transactions under the existing standards. Importantly, the application of this new guidance has no effect on the cash the Company expects to receive nor on the economics of the business, but rather affects the timing of revenue and expense recognition with the expectation that revenue recognition will more closely align with cash received.

In January 2016, the FASB issued ASU No. 2016-01 “Financial Instruments – Overall (Subtopic 825-10), Recognition and Measurement of Financial Assets and Financial Liabilities”. The amendments in this ASU update various aspects of recognition, measurement, presentation and disclosures relating to financial instruments. This ASU is effective for fiscal years beginning after December 15, 2017. The Company has determined that the most pertinent impact to its financial statements upon the adoption of this ASU will relate to the discontinuance of the available-for-sale classification for investments in equity securities (unrealized gains and losses were recorded through OCI). Accordingly, subsequent to adoption of this ASU, changes in the fair value of equity securities held by the Company will be recorded through earnings. The Company does not expect the adoption of this ASU to have a material impact on its financial statements.

In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842)” requiring lessees to recognize a right-of-use asset and lease liability for all leases with terms of more than 12 months. Recognition, measurement and presentation of expenses and cash flows will depend on classification as either a finance or operating lease. This ASU is effective for fiscal years beginning after December 15, 2018, with early adoption permitted. This standard must be adopted using a modified retrospective approach whereby leases will be presented in accordance with the new standard as of the earliest period presented. The Company is currently evaluating the impact of this ASU on the Company’s financial statements. The Company believes that the most notable impact to its financial statements upon the adoption of this ASU will be the recognition of a material right-of-use asset and lease liability for its real estate leases.

In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments – Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments”. The amendments in this ASU require the use of an “expected credit loss” impairment model for most financial assets reported at amortized cost which will require entities to estimate expected credit losses over the lifetime of the instrument. This may result in the earlier recognition of allowances for losses. For available-for-sale debt securities with unrealized losses, an allowance for credit losses will be recognized as a contra account to the amortized cost carrying value of the asset rather than a direct reduction to the carrying value, with changes in the allowance impacting earnings. This ASU is effective for annual and interim reporting periods beginning after December 15, 2019, with early adoption permitted in annual and interim reporting periods beginning after December 15, 2018. Entities will apply the standard’s provisions as a cumulative-effect adjustment to retained earnings as of the beginning of the first effective reporting period. The Company is currently evaluating the impact of this ASU on its financial statements. Currently, the Company believes that the most notable impact of this ASU will relate to its processes around the assessment of the adequacy of its allowance for doubtful accounts on accounts receivable.

 

In August 2016, the FASB issued ASU No. 2016-15, “Statement of Cash Flows (Topic 230), Classification of Certain Cash Receipts and Cash Payments”. This ASU adds or clarifies guidance on the classification of certain cash receipts and payments in the statement of cash flows with the intent to alleviate diversity in practice for classifying various types of cash flows. This ASU is effective for annual and interim reporting periods beginning after December 15, 2017. The Company will apply this clarification guidance in its statements of cash flows upon adoption.

In January 2017, the FASB issued ASU No. 2017-01, “Business Combinations (Topic 805), Clarifying the Definition of a Business”. This ASU clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. This ASU is effective for annual and interim reporting periods beginning after December 15, 2017 and should be applied prospectively. Upon adoption, the Company will apply the guidance in this ASU when evaluating whether acquired assets and activities constitute a business.

In March 2017, the FASB issued ASU No. 2017-07, “Compensation – Retirement Benefits (Topic 715), Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost”. This ASU impacts the presentation of net periodic pension costs in the statement of operations. Entities will be required to report the service cost component in the same line item or items as other compensation costs (either Operating or SG&A in Moody’s statement of operations). The other components of net benefit cost are required to be presented in the statement of operations separately from the service cost component and outside of operating income. The ASU permits only the service cost component of net periodic pension cost to be eligible for capitalization, when applicable. This ASU is effective for annual and interim reporting periods beginning after December 15, 2017. Upon adoption, the Company will bifurcate its net periodic pension costs reported in its statements of operations in accordance with this ASU.

In May 2017, the FASB issued ASU No. 2017-09, “Compensation—Stock Compensation (Topic 718), Scope of Modification Accounting”. This ASU clarifies when changes to the terms or conditions of a share-based payment award must be accounted for as modifications. Under this ASU, an entity will not apply modification accounting to a share-based payment award if the award’s fair value, vesting conditions and classification as an equity or liability instrument are the same immediately before and after the change. The new guidance will reduce diversity in practice and result in fewer changes to the terms of an award being accounted for as modifications. This ASU is effective for annual and interim reporting periods beginning after December 15, 2017 and should be applied prospectively to awards modified on or after the adoption date. The Company does not expect the adoption of this ASU to have a material impact on its financial statements.

In July 2017, the FASB issued ASU No. 2017-12, “Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities”. This ASU enables entities to enhance transparency relating to risk management activities and simplifies the application of hedge accounting in certain circumstances. This ASU is effective for fiscal years beginning after December 15, 2018, including interim periods within those years with early adoption permitted. The Company is currently in the process of assessing the impact that this ASU will have on its financial statements.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Tables)
Schedule of Cumulative Adjustment to Retained earnings due to prospective adoption of new revenue guidance.
Transition adjustment Estimated benefit to / (reduction of) January 1, 2018 Retained Earnings
Recognition of MA deferred revenue(1)Approximately $105 million
Increase to capitalized MA sales commissions(2)Approximately $76 million
Net impact of all other adjustmentsApproximately $4 million
Capitalization of work-in-process for in-progress ratingsApproximately $9 million
Net increase in tax liability on the above(Approximately $45 million)
Total anticipated post-tax adjustmentApproximately $149 million
(1) Represents anticipated deferred revenue as of December 31, 2017 that would have been recognized as revenue in 2017 or earlier if the new standard was then in effect. The transition adjustment will continue to be refined as the Company finalizes its implementation of the aforementioned software solution.
(2) Pending finalization of the final fourth quarter MA sales commission payout to be made during the first quarter.
Anticipated adjustment to expected benefit to (reduction of) Retained Earnings (Detail) (Revenue from Contracts with Customers [Member], Retained Earnings [Member], Approximation of Anticipated Impacts [Member], USD $)
In Millions, unless otherwise specified
Dec. 31, 2017
Summary Of Significant Accounting Policies [Line Items]
 
Effect of Adoption Adjustments to retained earnings
$ 149.0 
Other Adjustments [Member]
 
Summary Of Significant Accounting Policies [Line Items]
 
Effect of Adoption Adjustments to retained earnings
4.0 
Capitalization of Work-In-Process [Member]
 
Summary Of Significant Accounting Policies [Line Items]
 
Effect of Adoption Adjustments to retained earnings
9.0 
Increase in Tax Liability [Member]
 
Summary Of Significant Accounting Policies [Line Items]
 
Effect of Adoption Adjustments to retained earnings
45.0 
MA [Member] |
Recognition of Deferred Revenue [Member]
 
Summary Of Significant Accounting Policies [Line Items]
 
Effect of Adoption Adjustments to retained earnings
105.0 
MA [Member] |
Increase to capitalized sales commissions [Member]
 
Summary Of Significant Accounting Policies [Line Items]
 
Effect of Adoption Adjustments to retained earnings
$ 76.0 
Summary of Significant Accounting Policies - Additional Information (Detail) (USD $)
In Millions, unless otherwise specified
12 Months Ended
Dec. 31, 2017
Dec. 31, 2016
Dec. 31, 2015
Summary Of Significant Accounting Policies [Line Items]
 
 
 
Research and development costs
$ 42.0 
$ 40.1 
$ 29.1 
Deferred revenue related to rated securities
140.1 
133.0 
121.0 
Number of reporting units
 
 
Description of concentration risk, Customer
No customer accounted for 10% or more of accounts receivable at December 31, 2017 or 2016. 
 
 
Retained Earnings [Member]
 
 
 
Summary Of Significant Accounting Policies [Line Items]
 
 
 
Effect of Adoption Adjustments to retained earnings
4.6 
 
 
Commercial Paper [Member]
 
 
 
Summary Of Significant Accounting Policies [Line Items]
 
 
 
Accounts receivable related to accrued revenue
27.0 
25.0 
24.0 
Monitoring Service [Member]
 
 
 
Summary Of Significant Accounting Policies [Line Items]
 
 
 
Accounts receivable related to accrued revenue
$ 185.0 
$ 159.1 
$ 146.4 
MIS [Member]
 
 
 
Summary Of Significant Accounting Policies [Line Items]
 
 
 
Weighted average expected lives of the rated securities
24 years 
 
 
Number of reporting units
 
 
MA [Member]
 
 
 
Summary Of Significant Accounting Policies [Line Items]
 
 
 
Number of reporting units
 
 
RECONCILIATION OF WEIGHTED AVERAGE SHARES OUTSTANDING
RECONCILIATION OF WEIGHTED AVERAGE SHARES OUTSTANDING

NOTE 3 RECONCILIATION OF WEIGHTED AVERAGE SHARES OUTSTANDING

Below is a reconciliation of basic to diluted shares outstanding:

Year Ended December 31,
201720162015
Basic191.1192.7200.1
Dilutive effect of shares issuable under stock-based compensation plans3.12.73.3
Diluted194.2195.4203.4
Antidilutive options to purchase common shares and restricted stock as well as contingently issuable restricted stock which are excluded from the table above0.60.60.7

The calculation of diluted EPS requires certain assumptions regarding the use of both cash proceeds and assumed proceeds that would be received upon the exercise of stock options and vesting of restricted stock outstanding as of December 31, 2017, 2016 and 2015. The assumed proceeds in 2017 do not include Excess Tax Benefits pursuant to the prospective adoption of ASU 2016-09 in the first quarter of 2017. The assumed proceeds in 2016 and 2015 include Excess Tax Benefits.

The decrease in the diluted shares outstanding primarily reflects treasury share repurchases under the Company’s Board authorized share repurchase program.

RECONCILIATION OF WEIGHTED AVERAGE SHARES OUTSTANDING (Tables)
Reconciliation of Basic to Diluted Shares Outstanding
Year Ended December 31,
201720162015
Basic191.1192.7200.1
Dilutive effect of shares issuable under stock-based compensation plans3.12.73.3
Diluted194.2195.4203.4
Antidilutive options to purchase common shares and restricted stock as well as contingently issuable restricted stock which are excluded from the table above0.60.60.7
Reconciliation of Basic to Diluted Shares Outstanding (Detail)
In Millions, unless otherwise specified
12 Months Ended
Dec. 31, 2017
Dec. 31, 2016
Dec. 31, 2015
Schedule Of Weighted Average Number Of Diluted Shares Outstanding [Line Items]
 
 
 
Basic
191.1 
192.7 
200.1 
Dilutive effect of shares issuable under stock-based compensation plans
3.1 
2.7 
3.3 
Diluted
194.2 
195.4 
203.4 
Antidilutive options to purchase common shares and restricted stock as well as contingently issuable restricted stock which are excluded from the table above
0.6 
0.6 
0.7 
CASH EQUIVALENT AND INVESTMENTS
CASH EQUIVALENT AND INVESTMENT

NOTE 4 CASH EQUIVALENTS AND INVESTMENTS

The table below provides additional information on the Company’s cash equivalents and investments:

As of December 31, 2017
Balance sheet location
CostGross Unrealized GainsFair ValueCash and cash equivalentsShort-term investmentsOther assets
Money market mutual funds$42.2$-$42.2$42.2$-$-
Certificates of deposit and money market deposit accounts (1)$351.4$-$351.4$238.6$111.8$1.0
Fixed maturity and open ended mutual funds (2)$16.8$4.3$21.1$-$-$21.1
As of December 31, 2016
Balance sheet location
CostGross Unrealized GainsFair ValueCash and cash equivalentsShort-term investmentsOther assets
Money market mutual funds$189.0$-$189.0$189.0$-$-
Certificates of deposit and money market deposit accounts (1)$1,190.5$-$1,190.5$1,017.0$173.4$0.1
Fixed maturity and open ended mutual funds (2)$27.0$5.6$32.6$-$-$32.6
(1) Consists of time deposits and money market deposit accounts. The remaining contractual maturities for the certificates of deposits classified as short-term investments were one to 12 months at December 31, 2017 and at December 31, 2016. The remaining contractual maturities for the certificates of deposits classified in other assets are 15 to 48 months at December 31, 2017 and 13 months to 15 months at December 31, 2016. Time deposits with a maturity of less than 90 days at time of purchase are classified as cash and cash equivalents.
(2) Consists of investments in fixed maturity mutual funds and open-ended mutual funds. The remaining contractual maturities for the fixed maturity instruments range from six months to seven months and six months to 19 months at December 31, 2017 and December 31,2016 respectively.

The money market mutual funds as well as the fixed maturity and open ended mutual funds in the table above are deemed to be ‘available for sale’ under ASC Topic 320 and the fair value of these instruments is determined using Level 1 inputs as defined in the ASC.

CASH EQUIVALENT AND INVESTMENTS (Tables)
Schedule of Available for sale securities
As of December 31, 2017
Balance sheet location
CostGross Unrealized GainsFair ValueCash and cash equivalentsShort-term investmentsOther assets
Money market mutual funds$42.2$-$42.2$42.2$-$-
Certificates of deposit and money market deposit accounts (1)$351.4$-$351.4$238.6$111.8$1.0
Fixed maturity and open ended mutual funds (2)$16.8$4.3$21.1$-$-$21.1
As of December 31, 2016
Balance sheet location
CostGross Unrealized GainsFair ValueCash and cash equivalentsShort-term investmentsOther assets
Money market mutual funds$189.0$-$189.0$189.0$-$-
Certificates of deposit and money market deposit accounts (1)$1,190.5$-$1,190.5$1,017.0$173.4$0.1
Fixed maturity and open ended mutual funds (2)$27.0$5.6$32.6$-$-$32.6
(1) Consists of time deposits and money market deposit accounts. The remaining contractual maturities for the certificates of deposits classified as short-term investments were one to 12 months at December 31, 2017 and at December 31, 2016. The remaining contractual maturities for the certificates of deposits classified in other assets are 15 to 48 months at December 31, 2017 and 13 months to 15 months at December 31, 2016. Time deposits with a maturity of less than 90 days at time of purchase are classified as cash and cash equivalents.
(2) Consists of investments in fixed maturity mutual funds and open-ended mutual funds. The remaining contractual maturities for the fixed maturity instruments range from six months to seven months and six months to 19 months at December 31, 2017 and December 31,2016 respectively.
Cash Equivalent and Investments (Detail) (USD $)
In Millions, unless otherwise specified
12 Months Ended
Dec. 31, 2017
Dec. 31, 2016
Dec. 31, 2015
Dec. 31, 2014
Dec. 31, 2017
Money Market [Member]
Dec. 31, 2016
Money Market [Member]
Dec. 31, 2017
Certificates of Deposit [Member]
Dec. 31, 2016
Certificates of Deposit [Member]
Dec. 31, 2017
Fixed Maturity and Mutual Funds [Member]
Dec. 31, 2016
Fixed Maturity and Mutual Funds [Member]
Schedule of Available-for-sale Securities [Line Item]
 
 
 
 
 
 
 
 
 
 
Cost
 
 
 
 
$ 42.2 
$ 189.0 
$ 351.4 
$ 1,190.5 
$ 16.8 
$ 27.0 
Gross Unrealized Gain
 
 
 
 
 
 
 
 
4.3 
5.6 
Fair Value
21.1 
32.6 
 
 
42.2 
189.0 
351.4 
1,190.5 
21.1 
32.6 
Cash and Cash Equivalents
1,071.5 
2,051.5 
1,757.4 
1,219.5 
42.2 
189.0 
238.6 
1,017.0 
 
 
Short Term Investments
111.8 
173.4 
 
 
 
 
111.8 
173.4 
 
 
Other Assets
 
 
 
 
 
 
$ 1.0 
$ 0.1 
$ 21.1 
$ 32.6 
Cash Equivalent and Investments (Parenthetical) (Detail)
12 Months Ended
Dec. 31, 2017
Dec. 31, 2016
Minimum [Member] |
Certificates of Deposit [Member] |
Short Term Investments [Member]
 
 
Schedule Of Investments [Line Items]
 
 
Securities maturity period
1 month 
1 month