NOTE A – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES



The Company



USANA Health Sciences, Inc. develops and manufactures high-quality nutritional and personal care products that are sold internationally through a global direct selling system. The Consolidated Financial Statements include the accounts and operations of USANA Health Sciences, Inc. and its wholly-owned subsidiaries (collectively, the “Company” or “USANA”) in two geographic regions: Asia Pacific, and Americas and Europe.  Asia Pacific is further divided into three sub-regions: Greater China, Southeast Asia Pacific, and North Asia. 





 

Principles of Consolidation and Basis of Presentation



The accompanying Consolidated Financial Statements include the accounts and operations of USANA Health Sciences, Inc. and its wholly-owned subsidiaries.  All inter-company accounts and transactions have been eliminated in consolidation.  The accounting and reporting policies of the Company conform with accounting principles generally accepted in the United States of America (“US GAAP”). 

  

Use of Estimates



The preparation of consolidated financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period.  Significant estimates for the Company relate to revenue recognition and inventory valuation.  Actual results could differ from those estimates.  These estimates may be adjusted as more current information becomes available, and any adjustment could be significant.



Fiscal Year



The Company operates on a 52-53 week year, ending on the Saturday closest to December 31.  Fiscal years 2016, 2017 and 2018, were 52-week years.  Fiscal year 2016 covered the period January 3, 2016 to December 31, 2016 (hereinafter 2016).  Fiscal year 2017 covered the period January 1, 2017 to December 30, 2017 (hereinafter 2017).  Fiscal year 2018 covered the period December 31, 2017 to December 29, 2018 (hereinafter 2018).



Fair Value Measurements



The Company measures at fair value certain of its financial and non-financial assets and liabilities by using a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, essentially an exit price, based on the highest and best use of the asset or liability. The levels of the fair value hierarchy are:

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As of December 30, 2017 and December 29, 2018, the following financial assets and liabilities were measured at fair value on a recurring basis using the type of inputs shown:



There were no transfers of financial assets or liabilities between Level 1 and Level 2 inputs for the years ended 2017 and 2018.



The majority of the Company’s non-financial assets, which include goodwill, intangible assets, and property and equipment, are not required to be carried at fair value on a recurring basis. However, if certain triggering events occur (or tested at least annually for goodwill and indefinite-lived intangibles) such that a non-financial asset is required to be evaluated for impairment, an impairment charge is recorded to reduce the carrying value to the fair value, if the carrying value exceeds the fair value. For the years ended 2016, 2017, and 2018, there were no non-financial assets measured at fair value on a non-recurring basis.

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Fair Value of Financial Instruments



At December 30, 2017 and December 29, 2018, the Company’s financial instruments include cash equivalents, securities held-to-maturity, accounts receivable, restricted cash, notes receivable, and accounts payable. The recorded values of cash equivalents, accounts receivable, restricted cash, and accounts payable approximate their fair values, based on their short-term nature.  Historically, the carrying value of the notes receivable approximated fair value because the variable interest rates in the notes reflected current market rates.  During 2017, an impairment was recorded on a note receivable based on the estimated recoverable amount using Level 3 inputs, which approximates fair value.  This note receivable was settled during 2018.



Securities held-to-maturity consists of corporate bonds and commercial paper. The fair value of corporate bonds and commercial paper are priced using quoted market prices for similar instruments or non-binding market prices that are corroborated by observable market data, which is considered to be a Level 2 input. The carrying values of these corporate bonds and commercial paper approximate their fair values due to their short-term maturities.



Translation of Foreign Currencies



The functional currency of the Company’s foreign subsidiaries is the local currency of their country of domicile.  Assets and liabilities of the foreign subsidiaries are translated into U.S. dollar amounts at month-end exchange rates.  Revenue and expense accounts are translated at the weighted-average rates for the monthly accounting period to which they relate.  Equity accounts are translated at historical rates.  Foreign currency translation adjustments are accumulated as a component of other comprehensive income.  Gains and losses from foreign currency transactions are included in the “Other, net” component of Other income (expense) in the Company’s consolidated statements of comprehensive income.



Cash and Cash Equivalents



The Company considers all highly liquid investments with an original maturity of three months or less from the date of purchase to be cash equivalents.  Cash equivalents as of December 30, 2017 and December 29, 2018 consisted primarily of money market fund investments and amounts receivable from credit card processors.



Amounts receivable from credit card processors and other forms of electronic payment are considered cash equivalents because they are both short-term and highly liquid in nature and are typically converted to cash within three days of the sales transaction. Amounts receivable from credit card processors as of December 30, 2017 and December 29, 2018 totaled $11,517 and $11,860, respectively.



Restricted Cash



The Company is required to maintain cash deposits with banks in certain subsidiary locations for various operating purposes.  The most significant of these cash deposits relates to a deposit held at a bank in China, the balance of which was $3,076 as of December 30, 2017, and $2,908 as of December 29, 2018.  This deposit is required for the application of direct sales licenses by the Ministry of Commerce and the SAMR of the People’s Republic of China, and will continue to be restricted during the periods while the Company holds these licenses.  Restricted cash is included in the “Prepaid expenses and other current assets” and “Other assets” line item in the Company’s consolidated balance sheets.



Securities Held-to-Maturity



Investment securities as of December 29, 2018 consists of corporate bonds and commercial paper with initial terms of greater than three months and are classified as held-to-maturity (“HTM”). HTM securities are those securities in which the Company has the ability and intent to hold the security until maturity.  HTM securities are recorded at amortized cost. Premiums and discounts on HTM securities are amortized or accreted over the life of the related HTM security as an adjustment to yield using the effective-interest method. Such amortization and accretion is included in the "Other net" line item in the Company's consolidated statements of comprehensive income. Interest income is recognized when earned.

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A decline in the market value of any HTM security below cost that is deemed to be other-than-temporary results in an impairment to reduce the carrying amount to fair value. To determine whether an impairment is other-than-temporary, the Company considers all available information relevant to the collectability of the security, including past events, current conditions, and reasonable and supportable forecasts when developing an estimate of cash flows expected to be collected. No other-than-temporary impairments were recorded by the Company during the year ended December 29, 2018.  



Inventories



Inventories are stated at the lower of cost or net realizable value.  Cost is determined using a standard costing system which approximates the first-in, first-out method.  The components of inventory cost include raw materials, labor, and overhead.  Net realizable value is determined using various assumptions with regard to excess or slow-moving inventories, non-conforming inventories, expiration dates, current and future product demand, production planning, and market conditions.  A change in any of these variables could result in an adjustment to inventory.



Accounts Receivable



Accounts receivable are recorded at the invoiced amount and do not bear interest. The Company maintains an allowance for doubtful accounts for estimated losses inherent in its accounts receivable portfolio. In establishing the required allowance, management considers historical losses adjusted to take into account current market conditions and our customers’ financial condition, the amount of receivables in dispute, and the current receivables aging and current payment patterns. The Company reviews its allowance for doubtful accounts regularly. Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote.  Accounts Receivable is included in the “Prepaid expenses and other current assets” line item in the Company’s consolidated balance sheets.



Income Taxes



The Company accounts for income taxes using the asset and liability method, which requires recognition of deferred tax assets and liabilities for the expected future tax consequences of the differences between the financial statement assets and liabilities and their respective tax bases.  Deferred tax assets and liabilities are measured using enacted tax rates that are expected to apply to taxable income in the year in which those temporary differences are expected to be recovered or settled.  The effect on deferred tax assets and liabilities of a change in tax law is recognized in income in the period that includes the enactment date.  Deferred tax expense or benefit is the result of changes in deferred tax assets and liabilities. 



The Company evaluates the probability of realizing the future benefits of its deferred tax assets and provides a valuation allowance for the portion of any deferred tax assets where the likelihood of realizing an income tax benefit in the future does not meet the “more-likely-than-not” criteria for recognition.  The Company recognizes tax benefits from uncertain tax positions only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position.  The tax benefits recognized in the financial statements from such a position are measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate resolution.  The Company recognizes interest and penalties related to unrecognized tax benefits in income taxes. 

 

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Property and Equipment



Property and equipment are recorded at cost.  Maintenance, repairs, and renewals, which neither materially add to the value of the property nor appreciably prolong its life, are charged to expense as incurred.  Depreciation is provided in amounts sufficient to relate the cost of depreciable assets to operations over the estimated useful lives of the related assets.  The straight-line method of depreciation and amortization is followed for financial statement purposes.  Leasehold improvements are amortized over the shorter of the life of the respective lease or the useful life of the improvements.  Property and equipment are reviewed for impairment whenever events or changes in circumstances exist that indicate the carrying amount of an asset may not be recoverable.  When property and equipment are retired or otherwise disposed of, the cost and accumulated depreciation are removed from the accounts and any resulting gain or loss is included in the results of operations for the respective period.



Notes Receivable



At December 30, 2017, notes receivable consisted primarily of a secured loan to the former supplier of the Company’s nutrition bars and was included in the “Other assets” line item in the Company’s consolidated balance sheets.  The Company extended non-revolving credit to this former supplier to allow them to acquire equipment that was necessary to manufacture the USANA nutrition bars, which was secured by the equipment.  This relationship was intended to provide improved supply chain stability for USANA and create a mutually beneficial relationship between the parties.  Interest accrued at an annual interest rate of LIBOR plus 400 basis points. The note had a maturity date of February 1, 2024 and was to be repaid by a combination of cash payments and credits for the manufacture of USANA’s nutrition bars.  There was no prepayment penalty.  Manufacturing credits and cash payments applied were $420 and $0, in 2017 and 2018, respectively. 



A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments in accordance with the contractual terms of the loan. Factors considered in determining impairment include payment status, collateral value and the probability of collecting payments when due. During the first half of 2017, the Company experienced challenges with the former supplier of nutrition bars and subsequently determined to no longer use this supplier. The Company evaluated the recoverability of the note receivable from this supplier and recorded impairments totaling $2,734 during 2017.  The total contractual unpaid principal balance, including accrued unpaid interest on the note receivable from this supplier as of December 30, 2017 was $6,734.   During 2018, the Company reached a settlement with the supplier to terminate the relationship and received $4,800 in cash as payment in full under the terms of the settlement.



Goodwill



Goodwill represents the excess of the purchase price over the fair market value of identifiable net assets of acquired companies.  Goodwill is not amortized, but rather is tested at the reporting unit level at least annually for impairment or more frequently if triggering events or changes in circumstances indicate impairment.  Initially, qualitative factors are considered to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount.  Some of these qualitative factors may include macroeconomic conditions, industry and market considerations, a change in financial performance, entity-specific events, a sustained decrease in share price, and consideration of the difference between the fair value and carrying amount of a reporting unit as determined in the most recent quantitative assessment.  If, through this qualitative assessment, the conclusion is made that it is more likely than not that a reporting unit’s fair value is less than its carrying amount, a quantitative impairment analysis is performed.  This analysis involves estimating the fair value of a reporting unit using widely-accepted valuation methodologies including the income and market approaches, which requires the use of estimates and assumptions.  These estimates and assumptions include revenue growth rates, discounts rates, and determination of appropriate market comparables.  If the fair value of the reporting unit is less than its carrying amount, an impairment loss is recognized in an amount equal to the excess of the carrying amount over the fair value of the reporting unit, not to exceed the carrying amount of the goodwill.  During 2016, 2017, and 2018, no impairment of goodwill was recorded.

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Intangible Assets



Intangible assets represent amortized and indefinite-lived intangible assets acquired in connection with the purchase of the Company’s China subsidiary in 2010.  Amortized intangible assets are amortized over their related useful lives, using a straight-line or accelerated method consistent with the underlying expected future cash flows related to the specific intangible asset.  Amortized intangible assets are reviewed for impairment whenever events or changes in circumstances exist that indicate the carrying amount of an asset may not be recoverable.  When indicators of impairment exist, an estimate of undiscounted net cash flows is used in measuring whether the carrying amount of the asset or related asset group is recoverable.  Measurement of the amount of impairment, if any, is based upon the difference between the asset or asset group’s carrying value and fair value. Fair value is determined through various valuation techniques, including market and income approaches as considered necessary.



Indefinite-lived intangible assets are not amortized; however, they are tested at least annually for impairment or more frequently if events or changes in circumstances exist that may indicate impairment.  Initially, qualitative factors are considered to determine whether it is more likely than not that the fair value of an indefinite-lived intangible asset is less than its carrying amount.  If, through this qualitative assessment, the conclusion is made that it is more likely than not that an indefinite-lived intangible asset’s fair value is less than its carrying amount, a quantitative impairment analysis is performed by comparing the indefinite-lived intangible asset’s carrying amount to its fair value. The fair value for indefinite-lived intangible assets is determined through various valuation techniques, including market and income approaches as considered necessary. The amount of any impairment is measured as the difference between the carrying amount and the fair value of the impaired asset.  During 2016, 2017, and 2018, no impairment of indefinite-lived intangible assets was recorded.



Self Insurance



The Company is self-insured, up to certain limits, for employee group health claims.  The Company has purchased stop-loss insurance on both an individual and an aggregate basis, which will reimburse the Company for individual claims in excess of $150 and aggregate claims that are greater than $10,464.  A liability is accrued for all unpaid claims.  Total expense under this self-insurance program was $9,015,  $9,195 and $10,869 in 2016, 2017 and 2018, respectively.



Derivative Financial Instruments



The Company’s risk management strategy includes the select use of derivative instruments to reduce the effects of volatility in foreign currency exchange exposure on operating results and cash flows.  In accordance with the Company’s risk management policies, the Company does not hold or issue derivative instruments for trading or speculative purposes.



The Company recognizes all derivative instruments as either assets or liabilities in the balance sheet at their respective fair values.  When the Company becomes a party to a derivative instrument and intends to apply hedge accounting, the Company formally documents the hedge relationship and the risk management objective for undertaking the hedge, the nature of risk being hedged, and the hedged transaction, which includes designating the instrument for financial reporting purposes as a fair value hedge, a cash flow hedge, or a net investment hedge.  The Company also documents how the hedging instrument’s effectiveness in offsetting the hedged risk will be assessed prospectively and retrospectively, and a description of the method used to measure ineffectiveness.



The Company periodically uses derivative hedging instruments to hedge its net investment in its non U.S. subsidiaries designed to hedge a portion of the foreign currency exposure that arises on translation of the foreign subsidiaries into U.S. dollars. The effective portion of gains and losses attributable to these net investment hedges is recorded to foreign currency translation adjustment (“FCTA”) within accumulated other comprehensive income (loss) (“AOCI”) to offset the change in the carrying value of the net investment being hedged, and will subsequently be reclassified to net earnings in the period in which the hedged investment is either sold or substantially liquidated.

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As of December 30, 2017, there were no derivatives outstanding for which the Company has applied hedge accounting.  During the second quarter of 2018, the Company entered into and settled a forward contract designated as a net investment hedge with a notional value of $105,000 and realized a net gain of $739, which is reflected in the FCTA within AOCI.  The Company assessed hedge effectiveness determining the hedged instrument was highly effective and recorded no ineffectiveness.  As of December 29, 2018, there were no derivatives outstanding for which the Company has applied hedge accounting.



Common Stock Share Repurchases



The Company has a stock repurchase plan in place that has been authorized by the Board of Directors.  As of December 29, 2018,  $70,216 is available to repurchase shares under this plan.  During the years ended 2016, 2017, and 2018, the Company repurchased and retired 1,106 shares, 865 shares, and 900 shares for an aggregate price of $64,610,  $50,000, and $105,375, respectively.  The excess of the repurchase price over par value is allocated between additional paid-in capital and retained earnings on a pro-rata basis.  There currently is no expiration date on the remaining approved repurchase amount and no requirement for future share repurchases.



Revenue Recognition



As further discussed below in Recent accounting policies, the Company adopted ASC 606 effective at the beginning of fiscal 2018.  Refer to Note A - Summary of Significant Accounting Policies of the Company’s annual report on Form 10-K for the year ended December 30, 2017 for policies in effect for revenue recognition prior to December 31, 2017, which were based on ASC 605.



Revenue is recognized when, or as, control of a promised product or service transfers to a customer, in an amount that reflects the consideration to which the Company expects to be entitled in exchange for transferring those products or services.  Revenue excludes taxes that have been assessed by governmental authorities and that are directly imposed on revenue-producing transactions between the Company and its customers, including sales, use, value-added, and some excise taxes. Revenue recognition is evaluated through the following five-step process:

 

 

Product Revenue

 

A majority of the Company’s sales are for products sold at a point in time and shipped to customers, for which control is transferred to the customer as goods are delivered to the third party carrier for shipment.  The Company receives payment, primarily via credit card, for the sale of products at the time customers place orders and payment is required prior to shipment.  The Company does not recognize assets associated with costs to obtain or fulfill a contract with a customer.



The Company’s product sales contracts include terms that could cause variability in the transaction price for items such as discounts, credits, or sales returns.  Accordingly, the transaction price for product sales includes estimates of variable consideration to the extent it is probable that a significant reversal of revenue recognized will not occur. At the time of sale, the Company estimates a refund liability for the variable consideration based on historical experience, which is recorded within Other current liabilities in the consolidated balance sheet.



Initial product orders with a new customer may include multiple performance obligations related to sales discounts earned under the Company’s initial order reward program.  Under this program, the customer receives an option to apply the discounts earned on the initial order to two subsequent Auto Orders, which conveys a material right to the customer.  As such, the initial order transaction price is allocated to each separate performance obligation based on its relative standalone selling price and is recognized as revenue as each performance obligation is satisfied.

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Associate incentives represent consideration paid to a customer and include all forms of commissions, and other incentives paid to our Associates.  With the exception of commissions paid to Associates on personal purchases, which are considered a sales discount and are reported as a reduction to net sales, the incentives are paid for distinct services related to the Company’s product sales and are recorded as an expense when revenue for the goods is recognized.

 

Shipping and handling activities are performed upon delivery to the third party carrier for shipment.  The Company accounts for these activities as fulfillment costs.  Therefore, the Company recognizes the costs of these activities when revenue for the goods is recognized.  Shipping and handling costs are included in cost of sales for all periods presented.

 

With respect to will-call orders, the Company periodically assesses the likelihood that customers will exercise their contractual right to pick up orders and revenue is recognized when the likelihood is estimated to be remote.



Other Revenue

 

Other types of revenue include fees, which are paid by the customer at the beginning of the service period, for access to online customer service applications and annual account renewal fees for Associates, for which control is transferred over time as services are delivered and are recognized as revenue on a straight-line basis over the term of the respective contracts.



Revenue Disaggregation

 

Disaggregation of revenue by geographical region and major product line is included in Segment Information in Note L – Segment Information.

 

Contract Balances

 

When the timing of our provision of goods or services is different from the timing of the payments made by our customers, we recognize either a contract asset (performance precedes contractual due date) or a contract liability (customer payment precedes performance). 



Contract liabilities relate to deferred revenue for product sales for customer payments received in advance of shipment, for outstanding material rights under the initial order program, and for services where the performance obligations are satisfied over time as services are delivered.  Contract liabilities are recorded as deferred revenue within Other current liabilities in the consolidated balance sheets.  The Company typically does not have contract assets based on the payment terms included in the Company’s contracts and the balance of contract assets was $0 at December 29, 2018.

 

The following table provides information about contract liabilities from contracts with customers, including significant changes in the contract liabilities balances during the period. 





NOTE A – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – CONTINUED



Product Return Policy



All first-time product orders, regardless of condition, that are returned within the first 30 days following purchase are refunded at 100% of the sales price.  After the first order, all other returned product that is unused and resalable is refunded up to one year from the date of purchase at 100% of the sales price.  This standard policy differs in a few of our international markets due to the regulatory environment in those markets.  According to the terms of the Associate agreement, return of product where the purchase amount exceeds one hundred dollars and was not damaged at the time of receipt by the Associate may result in cancellation of the Associate's distributorship. Depending upon the conditions under which product was returned, customers may either receive a refund based on their original form of payment, or credit on account for a product exchange.  Product returns totaled approximately 0.7% of net sales in 2016, 2017, and 2018.   



Associate Incentives



Associate incentives expenses include all forms of commissions, and other incentives paid to our Associates, less commissions paid to Associates on personal purchases, which are considered a sales discount and are reported as a reduction to net sales.



Selling, General and Administrative



Selling, general and administrative expenses include wages and benefits, depreciation and amortization, rents and utilities, Associate event costs, advertising and professional fees, marketing, and research and development expenses.



Equity-Based Compensation



The Company records compensation expense in the financial statements for equity-based awards based on the grant date fair value which is the closing market value of the Company’s common stock on the date of the grant.  Equity-based compensation expense is recognized under the straight-line method over the period that service is provided, which is generally the vesting term.  Further information regarding equity awards can be found in Note K – Equity-Based Compensation.



Advertising



Advertising costs are charged to expense as incurred and are presented as part of selling, general and administrative expense.  Advertising expense totaled $12,266,  $11,503, and $10,345 in 2016, 2017, and 2018, respectively.



Research and Development



Research and development costs are charged to expense as incurred and are presented as part of selling, general and administrative expense.  Research and development expense totaled $8,842,  $8,952, and $10,242 in 2016, 2017, and 2018, respectively.



Earnings Per Share



Basic earnings per common share (EPS) are based on the weighted-average number of common shares that were outstanding during each period.  Diluted EPS include the effect of potentially dilutive common shares calculated using the treasury stock method, which include in-the-money, equity-based awards that have been granted but have not been issued.    When there is a loss, potential common shares are not included in the computation of diluted EPS, because to do so would be anti-dilutive. 

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Recent Accounting Pronouncements

Adopted accounting pronouncements



In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, “Revenue from Contracts with Customers (Topic 606).”  Also referred to as ASC 606, this update replaces existing revenue recognition guidance with a single comprehensive revenue model for entities to use in accounting for revenue arising from contracts with customers.  ASC 606 includes a five-step process by which entities recognize revenue to depict the transfer of goods or services to customers in amounts that reflect the consideration to which an entity expects to be entitled in exchange for those goods or services.  This standard also requires enhanced disclosures to enable users of financial statements to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers.



The Company adopted ASC 606 effective at the beginning of fiscal 2018 and applied the modified retrospective approach.  Accordingly, the Company recognized the cumulative effect of initially applying ASC 606 as an adjustment to the fiscal 2018 opening balance of retained earnings.  The comparative information has not been restated and continues to be presented according to accounting standards in effect for those periods.  The adoption of ASC 606 resulted in increased disclosures and a cumulative effect adjustment, but otherwise did not have a material impact on the Company’s consolidated financial statements.  As a result of the adoption of ASC 606, the Company updated its accounting policies related to revenue recognition.



Under ASC 606, the Company made a change in the timing for recognizing revenue on orders that have shipped but have not been delivered at period end.  Under the new standard, revenue is recognized when the customer obtains control of the goods and considering the indicators used to determine when control has passed to the customer, the Company has concluded that control transfers upon delivery to the third party carrier for shipment  as the Company no longer has physical possession of the goods, nor from the customer’s perspective does the Company have control, as the Company does not have the ability to redirect shipments in transit to the customer.  Therefore, revenue and related expense items including cost of goods sold and Associate incentives on orders that have shipped but have not been delivered at period end are no longer deferred.  Subsequent to the period of adoption, there has been no material impact on net income and related per-share amounts.



In November 2016, the FASB issued ASU No. 2016-18, “Statement of Cash Flows (Topic 230): Restricted Cash.”  The ASU requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The ASU is effective for annual and interim periods in fiscal years beginning after December 15, 2017.  The Company adopted ASU 2016-18 using a retrospective transition method during the quarter ended March 31, 2018.  The reclassified restricted cash balances from operating activities to changes in cash, cash equivalents and restricted cash on the consolidated statements of cash flows were not material for all periods presented.



In May 2017 the FASB issued ASU No. 2017-09, “Compensation-Stock Compensation (Topic 718): Scope of Modification Accounting.”  ASU 2017-09 provides clarification on when modification accounting should be used for changes to the terms or conditions of a share-based payment award.  ASU 2017-09 does not change the accounting for modifications but clarifies that modification accounting guidance should only be applied if there is a change to the value, vesting conditions, or award classification and would not be required if the changes are considered non-substantive.  The ASU is effective for all annual and interim periods in fiscal years beginning after December 15, 2017.  The Company adopted ASU 2017-09 during the quarter ended March 31, 2018 and the adoption of the standard did not have an impact on its consolidated financial statements.

NOTE A – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – CONTINUED



Issued accounting pronouncements not yet adopted



In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842).”  ASU 2016-02 is intended to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements.  Additionally, the ASU will require disclosures to help investors and other financial statement users better understand the amount, timing, and uncertainty of cash flows arising from leases, including qualitative and quantitative requirements.  The update requires lessees to apply a modified retrospective approach for recognition and disclosure, beginning with the earliest period presented.  In July 2018, the FASB issued ASU No. 2018-11, “Leases (Topic 842)” – Targeted Improvements, which allows an additional transition method to adopt the new lease standard at the adoption date, as compared to the beginning of the earliest period presented, and recognize a cumulative-effect adjustment to the beginning balance of retained earnings in the period of adoption.  The Company will adopt ASU 2016-02 in the first quarter of 2019, specifically, using the effective date method.  The Company has evaluated the impact of this ASU on the specific areas that apply to the Company and their potential impact to its processes, accounting, financial reporting, disclosures, and controls. The Company has determined that the overall impact of adopting this ASU will result in the recognition of right-of-use assets and lease liabilities in the range of $18,000 to $25,000 on the Company's balance sheet for facility lease agreements.  Additionally, the Company has prepaid land use rights related to production facilities in China of approximately $7,000 that will be reclassified to right-of-use assets upon adoption this ASU.  We do not expect a material impact as a cumulative-effect adjustment to the beginning balance of retained earnings.



In August 2017, the FASB issued ASU 2017-12, “Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities.”  ASU 2017-12 better aligns an entity’s risk management activities and financial reporting for hedging relationships through changes to both the designation and measurement guidance for qualifying hedging relationships and the presentation of hedge results. To satisfy that objective, the amendments expand and refine hedge accounting for both non-financial and financial risk components, and align the recognition and presentation of the effects of the hedging instrument and the hedged item in the financial statements.  For public business entities, the amendments in this ASU are effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years.  Early adoption is permitted.  The Company does not expect the adoption of ASU 2017-12 will have a material impact on its consolidated financial statements.



In August 2018, the FASB issued ASU 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement.”  ASU 2018-13 modifies the disclosure requirements for fair value measurements. The modifications removed the following disclosure requirements: (i) the amount of, and reasons for, transfers between Level 1 and Level 2 of the fair value hierarchy; (ii) the policy for timing of transfers between levels; and (iii) the valuation processes for Level 3 fair value measurements. This ASU added the following disclosure requirements: (i) the changes in unrealized gains and losses for the period included in other comprehensive income ("OCI") for recurring Level 3 fair value measurements held at the end of the reporting period; and (ii) the range and weighted average of significant observable inputs used to develop Level 3 fair value measurements. The amendments in this Update are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019.  The amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty should be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption. All other amendments should be applied retrospectively to all periods presented upon their effective date.  Early adoption is permitted. The Company does not expect the adoption of ASU 2018-13 will have a material impact on its consolidated financial statements.

NOTE A – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – CONTINUED



In August 2018, the FASB issued ASU 2018-15, “Intangibles - Goodwill and Other Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract.”  ASU 2018-15 aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The capitalized implementation costs of a hosting arrangement that is a service contract will be expensed over the term of the hosting arrangement. For public business entities, the amendments in this ASU are effective for annual and interim periods beginning after December 15, 2019. Early adoption is permitted, including adoption in any interim period. The amendments can be applied either retrospectively or prospectively to all implementation costs incurred after the adoption date.  The Company does not expect the adoption of ASU 2018-15 will have a material impact on its consolidated financial statements. 



No other new accounting pronouncement issued or effective during the fiscal year had, or is expected to have, a material impact on our consolidated financial statements.