Organization and Significant Accounting Policies
|12 Months Ended|
Mar. 31, 2020
|Accounting Policies [Abstract]|
|Organization and Significant Accounting Policies||Organization and Significant Accounting Policies
Nature of Business and Organization
KEMET Corporation, which together with its subsidiaries is referred to herein as “KEMET” or the “Company”, is a leading manufacturer of tantalum capacitors, multilayer ceramic capacitors, film capacitors, electrolytic capacitors, paper capacitors and solid aluminum capacitors, and Electro-Magnetic Compatible ("EMC") devices, sensors, and actuators. The Company is headquartered in Fort Lauderdale, Florida and has manufacturing plants and distribution centers located in the United States, Mexico, Europe and Asia. Additionally, the Company has wholly-owned foreign subsidiaries which primarily provide sales support for KEMET’s products in foreign markets.
KEMET is organized into three reportable segments: the Solid Capacitor Reportable Segment (“Solid Capacitors”), the Film and Electrolytic Reportable Segment (“Film and Electrolytic”), and the Electro-Magnetic, Sensors, and Actuators Reportable Segment ("MSA"). Each reportable segment is responsible for the operations of certain manufacturing sites as well as related research and development efforts.
Basis of Presentation
Certain amounts for the Consolidated Statements of Operations for fiscal years 2019 and 2018 have been revised to conform with the fiscal year 2020 presentation.
Principles of Consolidation
The accompanying Consolidated Financial Statements of the Company include the accounts of its wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation. Investment in entities in which the Company can exercise significant influence, but does not own a majority equity interest or otherwise control, are accounted for using the equity method and are included as equity method investments on the Consolidated Balance Sheets.
Cash equivalents of $48.3 million and $60.7 million at March 31, 2020 and 2019, respectively, consist of money market accounts and certificates of deposits with original terms of three months or less. The Company considers all liquid debt instruments with original maturities of three months or less to be cash equivalents.
Inventories are stated at the lower of cost or net realizable value. The Company maintains reserves for excess and slow-moving inventory to reflect a carrying amount for inventory that is stated at the lower of cost or net realizable value. The inventory reserve is an estimate and is adjusted based on slow moving and excess inventory, historical shipments, customer forecasts and backlog, and technology developments.
Raw materials and tool crib obsolescence reserves are based on usage over one and two years, respectively, and the Company maintains reserves for raw materials and tool cribs that exceed these ages. Finished goods obsolescence reserves are either based on product age limits determined by market requirements, and/or based on excess quantities that exceed product orders and historical product sales.
Inventory costs include material, labor and manufacturing overhead and most inventory costs are determined by the “first-in, first-out” (“FIFO”) method. For tool crib, a component of the Company’s raw material inventory, cost is determined under the average cost method. The Company has consigned inventory at certain customer locations totaling $9.8 million and $9.5 million at March 31, 2020 and 2019, respectively.
Property, Plant and Equipment
Property, plant, and equipment are stated at cost. Depreciation is calculated principally using the straight-line method over the estimated useful lives of the respective assets. Leasehold improvements are amortized using the straight-line method over the shorter of the estimated useful lives of the assets or the terms of the respective leases. Maintenance costs are expensed and expenditures for renewals and improvements are generally capitalized. Upon sale or retirement of property and equipment, the related cost and accumulated depreciation are removed, and any gain or loss is recognized. A long-lived asset classified as held for sale is initially measured and reported at the lower of its carrying amount or fair value less cost to sell. Long-lived assets to be disposed of other than by sale are classified as held and used until the long-lived asset is disposed of. Depreciation
expense, including amortization of finance leases, was $63.0 million, $46.7 million and $45.5 million for the fiscal years ended March 31, 2020, 2019 and 2018, respectively.
The Company evaluates long-lived assets for impairment whenever certain events or changes in circumstances may indicate that the recoverability of the carrying amount of property, plant, and equipment should be assessed, including, among others, a significant decrease in market value, a significant change in the business climate in a particular market, or a current period operating or cash flow loss combined with historical losses or projected future losses. Reviews are regularly performed to determine whether facts and circumstances exist which indicate the carrying amount of assets may not be recoverable. If any impairment indicators are determined to exist, the Company assesses the recoverability of its assets by comparing the projected undiscounted net cash flows associated with the related asset or group of assets over their remaining lives against their respective carrying amounts. If it is determined that the book value of a long-lived asset or asset group is not recoverable, an impairment loss would be calculated equal to the excess of the carrying amount of the long-lived asset over its fair value. The Company must make certain assumptions as to the future cash flows to be generated by the underlying assets. Those assumptions include the amount of volume increases, average selling price decreases, anticipated cost reductions, and the estimated remaining useful life of the equipment. Future changes in assumptions may negatively impact future valuations. Fair market value is based on the discounted cash flows that the assets will generate over their remaining useful lives or other valuation techniques. See Note 9, “(Gain) loss on write down and disposal of long-lived assets” for further discussion of property, plant and equipment impairment charges.
Goodwill and Other Intangible Assets
Goodwill and other intangible assets with indefinite useful lives are not amortized. The Company has the option to perform a qualitative assessment of goodwill and intangible assets with indefinite useful lives rather than completing an annual impairment test. The Company must assess whether it is more likely than not that the fair value of the reporting unit is less than its carrying amount for goodwill or that indefinite-lived intangible assets have fair values less than their carrying values. If the Company concludes that this is the case, it must perform the testing discussed described below. Otherwise, the Company does not need to perform any further assessment.
If deemed necessary, the Company performs annual impairment tests during the fourth quarter of each fiscal year and when otherwise warranted. The Company evaluates its goodwill on a reporting unit basis, which requires the Company to estimate the fair value of the reporting unit. The impairment test involves a comparison of the fair value of each reporting unit, with the corresponding carrying amounts. If the reporting unit’s carrying amount exceeds its fair value, then an indication exists that the reporting unit’s goodwill and intangible assets with indefinite useful lives may be impaired. The impairment to be recognized is measured by the amount by which the carrying value of the reporting unit’s goodwill being measured exceeds its implied fair value. The implied fair value of goodwill is the excess of the fair value of the reporting unit over the sum of the amounts assigned to identified net assets. As a result, the implied fair value of goodwill is generally the residual amount that results from subtracting the value of net assets, including all tangible assets and identified intangible assets, of the reporting unit’s fair value. The Company determines the fair value of its reporting units using an income-based, discounted cash flow (“DCF”) analysis, and market-based approaches (Guideline Publicly Traded Company Method and Guideline Transaction Method) which examine transactions in the marketplace involving the sale of the stocks of similar publicly owned companies, or the sale of entire companies engaged in operations similar to KEMET. The Company evaluates the value of its other indefinite-lived intangible assets (trademarks) using an income-based, relief from royalty analysis. In addition to the previously described reporting unit valuation techniques, the Company’s goodwill and intangible assets with indefinite useful lives impairment assessment also considers the Company’s aggregate fair value based upon the value of the Company’s outstanding shares of common stock.
The impairment reviews of goodwill and intangible assets with indefinite useful lives are subjective and involve the use of estimates and assumptions. Estimates of business enterprise fair value use discounted cash flow and other fair value appraisal models and involve making assumptions for future sales trends, market conditions, growth rates, cost reduction initiatives and cash flows for the next several years. Future changes in assumptions may negatively impact future valuations.
Equity Method Investments
Investments and ownership interests are accounted for under the equity method of accounting if the Company has the ability to exercise significant influence, but not control, over the entity. Investments accounted for under the equity method are initially recorded at cost, and the difference between the basis of the Company’s investment and the underlying equity in the net assets of the company at the investment date, is amortized over the lives of the related assets that gave rise to the difference.
The Company’s share of earnings or losses under the equity method investments and basis difference amortization is reported in the Consolidated Statements of Operations as “Equity income (loss) from equity method investments.” The Company reviews its investments and ownership interests accounted for under the equity method of accounting for impairment whenever events or changes in circumstances indicate a loss in the value of the investment may be other than temporary.
Deferred Income Taxes
The Company accounts for income taxes under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the fiscal years in which those temporary differences are expected to be recovered or settled.
The largest deferred tax asset consists of net operating loss carryforwards (“NOL”). The measurement of NOLs requires evaluation of prior transactions in the Company's stock, and the application of judgment and interpretation on both the nature of the holder and the underlying transaction resulting in changes to the holders. Based on management's evaluation, there has not been a historical change in control that would have limited the availability of NOLs. The Company periodically evaluates its NOLs and other net deferred tax assets based on an assessment of historical performance, ability to forecast future events, and the likelihood that the Company will realize the benefits through future taxable income. The Company makes certain estimates and judgments in the calculation for the provision for income taxes, in the resulting tax liabilities, and in the recoverability of deferred tax assets. Valuation allowances are recorded to reduce the net deferred tax assets to the amount that is more likely than not to be realized. It is reasonably possible that upon examination, tax authorities could propose adjustments to prior positions based on differences in judgments and interpretations, which could result in a significant increase to the Company's unrecognized tax liability balance if adjustments were to be assessed.
The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. The Company periodically evaluates its net deferred tax assets based on an assessment of historical performance, ability to forecast future events, and the likelihood that the Company will realize the benefits through future taxable income. Valuation allowances are recorded to reduce the net deferred tax assets to the amount that is more likely than not to be realized. The Company makes certain estimates and judgments in the calculation for the provision for income taxes, in the resulting tax liabilities, and in the recoverability of deferred tax assets. All deferred tax assets are reported as noncurrent in the Consolidated Balance Sheets.
Stock-based compensation for stock options is estimated on the date of grant using the Black-Scholes option-pricing model. The Black-Scholes model considers volatility in the price of the Company’s stock, the risk-free interest rate, the estimated life of the equity-based award, the closing market price of the Company’s stock on the grant date and the exercise price. The estimates utilized in the Black-Scholes calculation involve inherent uncertainties and the application of management judgment. The Company's stock options were fully expensed during the fiscal year ended March 31, 2017. Upon adoption of Accounting Standard Update (“ASU”) No. 2016-09, Compensation Stock-Compensation, the Company elected to discontinue estimating forfeitures. Stock-based compensation cost for restricted stock is measured based on the closing fair market value of the Company’s common stock on the date of grant. The Company recognizes stock-based compensation cost for arrangements with cliff vesting as expense ratably on a straight-line basis over the requisite service period. The Company recognizes stock-based compensation cost for arrangements with graded vesting as expense on an accelerated basis over the requisite service period.
Concentrations of Credit and Other Risks
The Company sells to customers globally. Credit evaluations of its customers’ financial condition are performed periodically, and the Company generally does not require collateral from its customers. There were no customers’ accounts receivable balances exceeding 10% of gross accounts receivable at March 31, 2020 or March 31, 2019.
Consistent with industry practice, the Company utilizes electronics distributors for a large percentage of its sales. Electronics distributors are an effective means to distribute the products to end-users. For fiscal years ended March 31, 2020, 2019, and 2018, net sales to electronics distributors accounted for 40.4%, 42.2% and 39.2%, respectively, of the Company’s total net sales. One distributor, TTI, Inc., accounted for $154.6 million, $184.3 million and $133.5 million of the Company’s net sales in fiscal years ended March 31, 2020, 2019, and 2018, respectively.
The Company translates the assets and liabilities of its foreign subsidiaries from their respective functional currencies to U.S. dollars at the spot rates as of the balance sheet date. Generally, our foreign subsidiaries use the local currency as their functional currency. Changes in the carrying value of these assets and liabilities attributable to fluctuations in spot rates are recognized as a component of equity in accumulated other comprehensive income ("AOCI"). Results of operations accounts are translated using average exchange rates for the year.
Assets and liabilities denominated in a currency that is different from a reporting entity's functional currency must first be remeasured from the applicable currency to the legal entity's functional currency. The effect of this remeasurement process is recognized in the Consolidated Statements of Operations.
Comprehensive Income (Loss)
Comprehensive income (loss) consists of net income, foreign currency translation gains (losses), post-retirement and defined benefit plan adjustments including those adjustments which result from changes in net prior service credit and actuarial gains (losses), equity interest in investee’s other comprehensive income (loss), gains (losses) on cash flow hedges, and gains (losses) on the excluded component of fair value hedges. Comprehensive income is presented in the Consolidated Statements of Comprehensive Income (Loss).
The following summary sets forth the components of accumulated other comprehensive income (loss) contained in the stockholders’ equity section of the Consolidated Balance Sheets (amounts in thousands):
(1) There were no significant tax effects associated with the cumulative currency translation gains and losses as of March 31, 2020, 2019, and 2018.
(2) Ending balance is net of a tax benefit of $3.5 million, $2.4 million, and $2.3 million as of March 31, 2020, 2019, and 2018, respectively.
(3) Activity for the years ended March 31, 2020 and 2019 are net of a tax expense of $1.1 million and $0.2 million, respectively.
(4) Foreign currency translation includes gains of $18.2 million and $5.0 million for fiscal years ended March 31, 2020 and 2019, respectively, related to a derivative instrument accounted for as a net investment hedge. Refer to Note 13, Derivatives, for further information.
(5) Cash flow hedges, net of tax for fiscal year ended March 31, 2020 includes losses of $24.3 million which were excluded from the assessment of hedge effectiveness.
Fair Value Measurement
The Company utilizes three levels of inputs to measure the fair value of (a) nonfinancial assets and liabilities that are recognized or disclosed at fair value in the Company’s Consolidated Financial Statements on a recurring basis (at least annually) and (b) all financial assets and liabilities. Nonfinancial assets that are measured at fair value on a nonrecurring basis, such as property, plant, and equipment, goodwill, intangible assets, equity method investments, and other long-lived assets are subject to fair value adjustments in certain circumstances, such as when there is evidence of impairment and the carrying amount of the related asset may not be recoverable. See Note 9, “(Gain) loss on write down and disposal of long-lived assets” for further discussion of property, plant and equipment impairment charges. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs.
The levels of inputs are as follows:
Assets and liabilities measured at fair value on a recurring basis as of March 31, 2020 and 2019 are as follows (amounts in thousands):
(1) Included in the line item “Cash and cash equivalents” on the Consolidated Balance Sheets.
(2) Certificates Deposits of $24.8 million and $32.2 million that mature in three months or less are included within the balance as of March 31, 2020 and 2019, respectively.
(3) Fair value for derivative assets and liabilities was determined by using a third-party matrix-pricing model that uses significant inputs derived from or corroborated by observable market data. Where applicable, these models discount future cash flow amounts using market-based observable inputs, including interest rate yield curves, and forward and spot prices for currencies. Fair value for total debt was determined by using a discounted cash flow based on current market interest rates.
The Company sells its products to distributors, original equipment manufacturers (“OEM”), and electronic manufacturing services providers (“EMS”) and recognizes revenue under the guidance provided in Accounting Standards Codification (“ASC”) 606, Revenue from Contracts with Customers (“ASC 606”). Consistent with the terms of ASC 606, the Company records revenue on product sales in the period in which the Company satisfies its performance obligation by transferring control over a product to a customer. The amount of revenue recognized reflects the consideration the Company expects to receive in exchange for transferring products to a customer. The Company has elected the practical expedient under ASC 606-10-32-18 and does not consider the effects of a financing component on the promised amount of consideration
because the period between when the Company transfers a product to a customer and when the customer pays for that product is one year or less. As performance obligations are expected to be fulfilled in one year or less, the Company has elected the practical expedient under ASC 606-10-50-14 and has not disclosed information relating to remaining performance obligations. Recognized revenue is net of certain adjustments common in the industry, including but not limited to:
SFSD, the Company's largest sales program, provides authorized distributors with the flexibility to meet marketplace prices by allowing them, upon a pre-approved case-by-case basis, to adjust their purchased inventory cost to correspond with current market demand. KEMET's SFSD program is specific to certain distributors within the Americas and EMEA regions. Requests for SFSD adjustments are considered on an individual basis, require a pre-approved cost adjustment quote from their local KEMET sales representative, and apply only to a specific customer, part, specified special price amount, specified quantity, and are only valid for a specific period of time. To estimate potential SFSD adjustments corresponding with current period sales, KEMET records an allowance based on historical SFSD credits, distributor inventory levels, and certain accounting assumptions, all of which are reviewed quarterly.
Under the Company's price protection program, KEMET has agreements with distributors in which the Company provides credits for the difference between the original price paid by those distributors and the Company's then current price. To estimate potential price protection credits corresponding with current period sales, the Company records an allowance based on historical price protection credits and certain accounting assumptions.
The Company has a stock return program whereby select distributors have the right to return a certain portion of their purchased inventory to KEMET from the previous fiscal quarter. The Company estimates future returns based on historical return patterns and records a corresponding right of return asset and refund liability as a component of the line items, “Inventories, net” and “Accrued expenses,” respectively, on the Consolidated Balance Sheets.
As it relates to quality returns, the Company provides a limited assurance warranty on products that meet certain specifications to select customers. The warranty coverage period is generally limited to one year for United States based customers and a length of time commensurate with regulatory requirements or industry practice outside the United States. A warranty cannot be purchased by the customer separately and, as a result, product warranties are not considered to be separate performance obligations. The Company’s liability under these warranties is generally limited to a replacement of the product or refund of the purchase price of the product.
The Company also offers volume-based rebates on a case-by-case basis to certain customers in each of the Company’s sales channels.
The Company's sales adjustments are recognized as a reduction in the line item “Net sales” on the Consolidated Statements of Operations, while the associated allowance is included in the line item “Accounts receivable, net” on the Consolidated Balance Sheets. Estimates used in determining sales allowances are subject to various factors. This includes, but is not limited to, changes in economic conditions, pricing changes, product demand, inventory levels in the supply chain, the effects of technological change, and other variables that might result in changes to the Company’s estimates.
The Company has elected the practical expedient under ASC 606-10-10-4 and evaluates these sales-related adjustments on a portfolio basis.
Disaggregation of Revenue
Refer to Note 8, “Reportable Segment and Geographic Information” for revenue disaggregated by primary geographical market, sales channel, and major product line.
Contract liabilities consist of advance payments from certain customers for the development of additional production capacity or as upfront deposits for certain contracts. The current and noncurrent portions of these liabilities are included as a
component of the line items, “Accrued expenses” and “Other non-current obligations,” respectively, on the Consolidated Balance Sheets.
The balance of net contract liabilities consisted of the following at March 31, 2020 and 2019 (amounts in thousands):
Included within the balance for non-current contract liabilities as of March 31, 2020 and 2019 is $56.5 million and $13.4 million, respectively, related to agreements with three different customers (the “Customers”) pursuant to which the Customers agreed to make advances (collectively, the “Advances”) to the Company in an aggregate amount of up to $72.0 million (collectively, the “Customer Capacity Agreements”). The above balances are “Contract liabilities” within “Other non-current obligations” in the Consolidated Balance Sheets. The Company is using these Advances to fund the purchase of production equipment and to make other investments and improvements in its business and operations (the “Investments”) to increase overall capacity to produce various electronic components of the type and part as may be sold by the Company to the Customers from time to time. The Company retains all rights to the production equipment purchased with the funds from the Advances. The Advances from the Customers are being made in quarterly installments (“Installments”) over an expected period of 18 to 24 months from the effective date of the Customer Capacity Agreements. The effective dates of the Customer Capacity Agreements range from September 2018 to February 2019.
The Advances will be repaid beginning on the date that production from the Investments is sufficient to meet the Company's obligations under the agreements with the Customers. Repayments will be made on a quarterly basis as determined by calculations that generally consider the number of components purchased by the Customers during the quarter. Repayments based on the calculations will continue until either the Advances are repaid in full, or December 31, 2038 for all three Customers. The Company has a quarterly repayment cap in the agreement with each of the Customers and is not required to make any quarterly repayments to the Customers that in the aggregate exceeds $1.8 million. If the Customers do not purchase a minimum number of components that would require full repayment of the Advances by December 31, 2038, then the Advances shall be deemed repaid in full. Additionally, if the Customers do not purchase a minimum number of components that would require a payment on the Advances for a period of 16 consecutive quarters, the Advances shall be deemed repaid in full.
During fiscal year 2020, the Company had $42.8 million in capital expenditures related to the Customer Capacity Agreements.
For the fiscal years ended March 31, 2020, 2019 and 2018, the Company recognized revenue of $0.3 million, $0.9 million, and $0.3 million, respectively, related to contract liabilities. Revenue related to contract liabilities is recorded on the Consolidated Statements of Operations in the line item, "Net sales."
Allowance for Doubtful Accounts
The Company evaluates the collectability of trade receivables through the analysis of customer accounts. When the Company becomes aware that a specific customer has filed for bankruptcy, has begun closing or liquidation proceedings, has become insolvent or is in financial distress, the Company records a specific allowance for the doubtful account to reduce the related receivable to the amount the Company believes is collectible. If circumstances related to specific customers change, the Company’s estimates of the recoverability of receivables could be adjusted. Accounts are written off after all means of collection, including legal action, have been exhausted.
Shipping and Handling Costs
The Company’s shipping and handling costs are reflected in the line item “Cost of sales,” on the Consolidated Statements of Operations. Shipping and handling costs were $27.5 million, $31.0 million, and $21.4 million in the fiscal years ended March 31, 2020, 2019 and 2018, respectively.
The Company expenses advertising costs in the period in which the expenditures are incurred. Advertising costs reflected in the line item "Selling, general and administrative expenses" in our Consolidated Statements of Operations were $3.1 million, $2.5 million, and $2.4 million in fiscal years ended March 31, 2020, 2019 and 2018, respectively.
Income per Share
Basic income per share is computed using the weighted-average number of shares outstanding. Diluted income per share is computed using the weighted-average number of shares outstanding adjusted for the incremental shares attributed to the warrant issued in May 2009 to K Financing, LLC by the Company (the “Platinum Warrant”) and outstanding employee stock grants if such effects are dilutive. On September 11, 2017, the Platinum Warrant was exercised in full.
The Company from time to time enters into contracts to perform projects in which governmental agencies agree to reimburse the Company for certain expenses incurred on the projects. The Company recognizes revenue from government grants when it is probable that the Company will comply with the conditions attached to the grant agreement and the grant proceeds will be received. Additionally, from time to time the Company receives interest free loans from governmental agencies in consideration of the Company making investments in operations in certain locations. As the loans are interest free, the Company records deferred grant income for the difference between the gross loan proceeds and the present value of the debt at the time the loan is issued. The deferred grant income is amortized over the life of the loans. During the fiscal years ended March 31, 2020, 2019, and 2018, the Company recognized $1.6 million, $4.6 million, and $0.8 million respectively, as grant income within other (income) expense, net.
Derivative Financial Instruments
The Company, when deemed appropriate, uses derivatives as a risk management tool to mitigate the potential impact of certain market risks. The primary market risk managed by the Company through the use of derivative financial instruments is foreign currency exchange risk. All derivatives are carried at fair value in our Consolidated Balance Sheets. See Note 13, "Derivatives," for further discussion of derivative financial instruments.
ASC 842 requires the recognition of right-of-use (“ROU”) assets and lease liabilities for operating leases on the Consolidated Balance Sheets. The Company adopted ASC 842 using a modified retrospective transition approach by applying the new standard to all leases existing at the date of initial application and not restating comparative periods. The Company elected the package of practical expedients permitted under the transition guidance, which allowed the Company to not reassess whether arrangements contained leases, not reassess lease classifications, and not reassess initial direct costs. The adoption of ASC 842 did not impact beginning retained earnings, or the prior year Consolidated Statements of Operations and Cash Flows. An initial right-of-use asset of $36.3 million was recognized as a non-cash asset addition upon adoption of the new lease accounting standard effective April 1, 2019.
Under ASC 842, the Company determines if an arrangement contains a lease at inception based on whether or not the Company has the right to control the asset during the contract period and other facts and circumstances. The Company has elected to not allocate the contract consideration for operating lease contracts with lease and non-lease components, and instead to account for the lease and non-lease components as a single lease component. Operating lease ROU assets represent the Company's right to use an underlying asset for the lease term and lease liabilities represent the Company's obligation to make lease payments arising from the lease, both of which are recognized based on the present value of the future minimum lease payments over the lease term at the commencement date. The operating lease ROU asset also includes any lease prepayments, net of lease incentives.
Leases with a lease term of 12 months or less at inception are not recorded on the Consolidated Balance Sheets and are expensed on a straight-line basis over the lease term in the Consolidated Statements of Operations. The lease term is determined by assuming the exercise of renewal options that are reasonably certain. As most of the Company's leases do not provide an implicit interest rate, the Company uses its local incremental borrowing rate at the lease commencement date to determine the present value of lease payments.
ROU assets and the short-term and long-term lease liabilities from operating leases are included in “Other assets,” “Accrued expenses,” and “Other non-current obligations,” respectively, in the Consolidated Balance Sheet. The Company's accounting for finance leases (formerly referred to as capital leases prior to the adoption of ASC 842) remains substantially unchanged. Finance leases are not material to the Company's Consolidated Financial Statements. Refer to Note 14, Leases, for additional information regarding the Company's leases and related transition adjustments.
Use of Estimates
The preparation of consolidated financial statements in conformity with U.S. generally accepted accounting principles (“GAAP”) requires management to make a number of estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements. In addition, they affect the reported amounts of revenues and expenses during the reporting period. Significant items subject to such estimates and assumptions include impairment of property and equipment, intangibles and goodwill, allowances for doubtful accounts, price protection and customers’ returns, deferred income taxes, and assets and obligations related to employee benefits. Actual results could differ from these estimates and assumptions.
Recently Adopted Accounting Pronouncements
On April 1, 2019, the Company early adopted ASU No. 2018-15, Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract. This ASU amends the definition of a hosting arrangement and requires a customer in a hosting arrangement that is a service contract to capitalize certain implementation costs as if the arrangement was an internal-use software project. Under this ASU, a customer will apply ASC 350-40 to determine whether to capitalize implementation costs of the cloud computing arrangement that is a service contract or expense them as incurred. The Company early adopted this ASU in the first quarter of fiscal year 2020 and applied the ASU prospectively to implementation costs incurred after April 1, 2019. The adoption of this ASU did not have a material impact on our Consolidated Financial Statements.
On April 1, 2019, the Company adopted Topic 842, as amended, which superseded the lease accounting guidance under Topic 840, and generally requires lessees to recognize operating and financing lease liabilities and corresponding ROU assets on the balance sheet and to provide enhanced disclosures surrounding the amount, timing, and uncertainty of cash flows arising from leasing arrangements. The Company adopted the new guidance using the modified retrospective transition approach by applying the standard to all leases existing as of the date of the initial application and not restating comparative periods. The most significant impact was the recognition of ROU assets and lease liabilities for operating leases, while our accounting for finance leases remained substantially unchanged. For information regarding the impact of Topic 842 adoption, see “Significant Accounting Policies - Leases” above and Note 14, "Leases."
Recent Accounting Pronouncements Not Yet Adopted
In March 2020, the Financial Accounting Standards Board (“FASB”) issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting (“ASU 2020-04”) to provide temporary optional expedients and exceptions to the contract modifications, hedge relationships, and other transactions affected by reference rate reform if certain criteria are met. This ASU, which was effective upon issuance and may be applied through December 31, 2022, is applicable to all contracts and hedging relationships that reference the London Interbank Offered Rate or any other reference rate expected to be discontinued. The Company is currently evaluating the impact of this ASU on our Consolidated Financial Statements.
In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, which simplifies the accounting for income taxes. The guidance will be effective for the Company in the first quarter of fiscal year 2022 on a prospective basis, and early adoption is permitted. The Company is currently evaluating the impact of this ASU on our Consolidated Financial Statements.In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”), which requires the measurement and recognition of expected credit losses for financial assets held at amortized cost. ASU 2016-13 replaces the existing incurred loss impairment model with a forward-looking expected credit loss model which will result in earlier recognition of credit losses. The guidance will be effective for the Company in the first quarter of fiscal year 2021. The Company is currently evaluating the impact this ASU will have on our Consolidated Financial Statements, but the adoption of this guidance is not expected to have a material impact.
The entire disclosure for the general note to the financial statements for the reporting entity which may include, descriptions of the basis of presentation, business description, significant accounting policies, consolidations, reclassifications, new pronouncements not yet adopted and changes in accounting principles.
Reference 1: http://fasb.org/us-gaap/role/ref/legacyRef