|INTUITIVE SURGICAL INC filed this Form 10-K on 02/02/2018|
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obligations in system sales arrangements with multi-year service commitments, the Company currently expects that a greater amount of revenue will be allocated to the product related performance obligations under the New Revenue Standard. This is expected to result in a shift or reclassification of $9 million and $6 million from service to product revenue for fiscal year 2017 and 2016, respectively. In addition, contract acquisition costs, such as sales commissions paid in connection with system sales with multi-year service contracts, will be capitalized and amortized over the economic life of the contract under the New Revenue Standard. Under the current guidance, the Company expenses such costs when incurred. As a result, the Company currently expects that operating expenses will decrease by approximately $1 million and $2 million for fiscal years 2017 and 2016, respectively.
The New Revenue Standard is principle based and interpretation of those principles may vary from company to company based on their unique circumstances. It is possible that interpretation, industry practice, and guidance may evolve as companies and the accounting profession work to implement this new standard. While substantially complete, the Company is still in the process of finalizing its evaluation of the effect of the New Revenue Standard on the Company’s historical financial statements and disclosures. The Company will finalize its accounting assessment and quantitative impact of the adoption of the New Revenue Standard during the first quarter of fiscal year 2018. As the Company completes its evaluation of this new standard, new information may arise that could change the Company’s current understanding of the impact to revenue and expense recognized. Additionally, the Company will continue to monitor industry activities and any additional guidance provided by regulators, standards setters, or the accounting profession and adjust the Company’s assessment and implementation plans accordingly.
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which amends the existing accounting standards for leases. The new standard requires lessees to record a right-of-use asset and a corresponding lease liability on the balance sheet (with the exception of short-term leases). The new standard also requires expanded disclosures regarding leasing arrangements. The new standard becomes effective for the Company in the first quarter of fiscal year 2019 and early adoption is permitted. The new standard is required to be adopted using the modified retrospective approach and requires application of the new standard at the beginning of the earliest comparative period presented. The Company generally does not lease equipment or other capital assets, but does lease some of its facilities. The Company’s customers finance purchases of systems and ancillary products, including directly with the Company. It is currently unknown whether the new standard will change customer buying patterns or behaviors. The Company is evaluating the effect that this new standard will have on its Financial Statements and related disclosures.
In October 2016, the FASB issued ASU 2016-16, Income Taxes (Topic 740): Intra-Entity Transfer of Assets Other than Inventory, which requires the recognition of the income tax consequences of an intra-entity transfer of an asset, other than inventory, when the transfer occurs. Previously, the recognition of current and deferred income taxes associated with an intra-entity asset transfer was prohibited until an asset had been sold to a third party. This ASU will be effective for the Company in first quarter of 2018. This ASU is required to be adopted using the modified retrospective approach, with a cumulative catch-up adjustment to retained earnings in the period of adoption. Upon adoption, the Company will record deferred tax assets with an offset to opening retained earnings for amounts that entity had previously not recognized under existing guidance, but would be required to recognize under the new guidance. The Company currently expects that the adoption will result in an increase in deferred tax assets, with the corresponding cumulative effect adjustment recorded in retained earnings of approximately $390 million associated with an intra-entity transfer of certain intellectual property rights related to the Company’s non-U.S. business to its Swiss entity. The estimated adoption date impact may be materially different as a result of recording additional deferred taxes upon finalization of the assessment of global intangible low-taxed income (“GILTI”) and other aspects from additional guidance and interpretations by U.S. regulatory and standard-setting bodies related to the Tax Cuts and Jobs Act (“2017 Tax Act”).
In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business, which clarifies the definition of a business to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The standard will be effective for the Company in the first quarter of 2018. The Company does not expect a material impact upon the adoption of this ASU. Adoption of this ASU will not impact prior periods but may impact the accounting of future transactions.
Adopted Accounting Pronouncement
Beginning in fiscal year 2017, the Company adopted ASU No. 2016-09, Improvements to Employee Share-based Payment Accounting, which changes among other things, how the tax effects of share-based awards are recognized. ASU No. 2016-09 requires excess tax benefits and tax deficiencies to be recognized in the provision for income taxes as discrete items in the period when the awards vest or are settled, whereas previously such income tax effects were generally recorded as part of additional paid-in capital. The provision for income taxes for the year ended December 31, 2017, included excess tax benefits of $102.8 million that reduced the Company’s effective tax rate by 9.4 percentage points. The recognized excess tax benefits resulted from share-based compensation awards that vested or were settled during the year ended December 31, 2017. This ASU also eliminates the requirement to reclassify cash flows related to excess tax benefits from operating activities to financing activities on the Company's Consolidated Statements of Cash Flows. The Company adopted this provision retrospectively by reclassifying $44.1 million and $34.3 million of excess tax benefits from financing activities to operating activities for the year ended December 31, 2016, and 2015, respectively. The Company also excluded the related tax benefits when applying the treasury stock method for computing diluted shares outstanding on a prospective basis as required by this ASU. In addition, the Company elected to continue its current
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