As discussed in Note 1, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606), in 2014. The standard outlines a five-step model whereby revenue is recognized as performance obligations within a contract are satisfied. The standard also requires new, expanded disclosures regarding revenue recognition. Several ASUs have been issued since the issuance of ASU 2014-09, which modify certain sections of ASU 2014-09 and are intended to promote a more consistent interpretation and application of the principles outlined in the standard.

We adopted the new standard, ASC Topic 606, on January 1, 2018. We will account for our revenue in accordance with ASC Topic 606, using the modified retrospective method with a cumulative-effect adjustment to opening retained earnings. The new ASC Topic 606 guidance was only applied to contracts that were not completed as of the effective date of adoption. During implementation of the standard, we identified performance obligations on the basis of the contractual arrangements as of the adoption date, including any contract modifications since inception; determined the transaction price, including any variable consideration, as of the transition date; and allocated the transaction price to the performance obligations identified.

The majority of our revenue is derived from long-term contracts and programs that can span several years. Our long-term contracts will continue to recognize revenue and earnings over time as services are rendered because of the continuous transfer of control to the customer, using an input measure (e.g., costs incurred to total estimated cost) to reflect progress. The adoption of ASC Topic 606 will have the most significant impact to our accounting for firm-fixed price contracts. Our firm-fixed price contracts will continue to recognize revenue and earnings over time because of the continuous transfer of services to the customer, using an input measure of costs incurred, to reflect progress. However, we will be precluded from recognizing adjustments in estimated costs at completion as costs incurred in excess of billings on the balance sheet for firm-fixed price contracts. Adjustments in contract estimates for firm-fixed price contracts will result in more variability to revenue from period to period. The total impact of an adjustment in estimated profit recorded to date on a contract will continue to be recognized in the period it is identified (cumulative catch-up method). Despite this variability, a firm-fixed price contract’s cash flows and overall profitability at completion are the same as under the prior revenue recognition standard. Anticipated losses on contracts will continue to be recognized in the quarter in which they are identified.

The assessment of our January 1, 2018, Consolidated Balance Sheet under ASC Topic 606 will result in a cumulative-effect adjustment to opening retained earnings, unbilled receivables, costs incurred in excess of billings for firm-fixed price contracts, and other contract liabilities. These adjustments will not materially change the total amount of net assets as of December 31, 2017.

The effects of the adoption under ASC Topic 606 are outlined in the table below:

As required by the new ASC Topic 606 revenue recognition guidance using the modified retrospective method, in 2018 we will report impacted financial statement line items under the new ASC Topic 606 revenue recognition guidance as well as what those impacted financial statement line items would have been in 2018 under the former ASC Topic 605 revenue guidance during the year 2018.

 

In accordance with contract modification guidance in ASC Topic 606, we will not retrospectively restate contracts that were modified before January 1, 2018. Instead, we have reflected the aggregate effect of such modifications when identifying the satisfied and unsatisfied performance obligations and determining and allocating the transaction price.