Sirius XM Holdings Inc. Quarterly report pursuant to Section 13 or 15(d)

Quarterly report pursuant to Section 13 or 15(d)

Summary of Significant Accounting Policies

Summary of Significant Accounting Policies

3 Months Ended

Mar. 31, 2018

Summary of Significant Accounting Policies

Fair Value Measurements

For assets and liabilities required to be reported at fair value, GAAP provides a hierarchy that prioritizes inputs to valuation techniques used to measure fair value into three broad levels. Level 1 inputs are based on unadjusted quoted prices in active markets for identical instruments. Level 2 inputs are inputs, other than quoted market prices included within Level 1, that are observable for the asset or liability, either directly or indirectly. Level 3 inputs are unobservable inputs for the asset or liability. As of March 31, 2018 and December 31, 2017, the carrying amounts of cash and cash equivalents, receivables, and accounts payable approximated fair value due to the short-term nature of these instruments.

Our assets and liabilities measured at fair value were as follows:



	March 31, 2018						December 31, 2017
	Level 1	Level 2		Level 3	Total Fair Value		Level 1	Level 2		Level 3	Total Fair Value
Assets:
Pandora Media, Inc. (“Pandora”) - investment ^(a)	—	$	511,847	—	$	511,847	—	480,472		—	$	480,472
Liabilities:
Debt ^(b)	—	$	6,756,559	—	$	6,756,559	—	$	6,987,473	—	$	6,987,473


(a)	During the year ended December 31, 2017, Sirius XM completed a $480,000 investment in Pandora. We have elected the fair value option to account for this investment. Refer to Note 10 for information on this transaction.


(b)	The fair value for non-publicly traded debt is based upon estimates from a market maker and brokerage firm. Refer to Note 11 for information related to the carrying value of our debt as of March 31, 2018 and December 31, 2017.

Accumulated Other Comprehensive Income (Loss)

Accumulated other comprehensive income of $12,836 was primarily comprised of the cumulative foreign currency translation adjustments related to our investment in and loan to Sirius XM Canada Holdings Inc. (“Sirius XM Canada”) (refer to Note 10 for additional information). During the three months ended March 31, 2018, we recorded a foreign currency translation adjustment loss of $9,584 net of tax of $3,072. In addition, we recorded $4,013 related to the adoption of Accounting Standards Update ("ASU") 2018-02, Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income.

Recent Accounting Pronouncements

In February 2016, the Financial Accounting Standards Board (“FASB”) issued ASU 2016-02, Leases (Topic 842). This ASU requires a company to recognize lease assets and liabilities arising from operating leases in the statement of financial position. This ASU does not significantly change the previous lease guidance for how a lessee should recognize the recognition, measurement, and presentation of expenses and cash flows arising from a lease. Additionally, the criteria for classifying a finance lease versus an operating lease are substantially the same as the previous guidance. The amendments in this ASU are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, and early adoption is permitted. This ASU must be adopted using a modified retrospective approach. We plan to adopt this ASU on January 1, 2019. We are in the process of evaluating the impact of adoption of this ASU on our consolidated financial statements. We currently believe the most significant changes will be related to the recognition of right-of-use assets and lease liabilities on our consolidated balance sheets for operating leases.

Recently Adopted Accounting Policies

ASU 2014-09, Revenue - Revenue from Contracts with Customers. In May 2014, the FASB issued ASU 2014-09 which requires entities to recognize revenues when control of the promised goods or services is transferred to customers at an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services. In addition, the standard requires disclosure of the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. We adopted ASU 2014-09, and all related amendments, which established Accounting Standards Codification (“ASC”) Topic 606 (the "new revenue standard"), effective as of January 1, 2018. We adopted the new revenue standard using the modified retrospective method by recognizing the cumulative effect of initially applying the new revenue standard to all non-completed contracts as of January 1, 2018 as an adjustment to opening Accumulated deficit in the period of adoption. Results for reporting periods beginning after January 1, 2018 are presented under the new revenue standard, while prior period amounts are not adjusted and continue to be reported in accordance with our historic accounting under Topic 605.

The new revenue standard primarily impacts how we account for revenue share payments as well as other immaterial impacts.

Revenue Share

We previously recorded revenue share related to paid trials as Revenue share and royalties expense. Under the new revenue standard, we have recorded these revenue share payments as a reduction to revenue as the payments do not transfer a distinct good or service to us. Prior to the adoption, a portion of deferred revenue was for the revenue share related to paid trials. Under the new revenue standard, we reclassified the revenue share related to paid trials existing as of the date of adoption from Current portion of deferred revenue to Accounts payable and accrued expenses. For new paid trials, the net amount of the paid trial will be recorded as deferred revenue and the portion of revenue share will be recorded to Accounts payable and accrued expenses.

Other Impacts

Other impacts of the new revenue standard include:

•

Activation fees were previously recognized over the expected subscriber life using the straight-line method. Under the new revenue standard, the activation fees have been recognized over a one month period from activation as the activation fees are non-refundable and they do not convey a material right. As of January 1, 2018, we reduced deferred revenue related to activation fees of $8,260, net of tax, to Accumulated deficit.

•

Loyalty payments to OEMs were previously expensed when incurred as Subscriber acquisition costs. Under the new revenue standard, these costs have been capitalized in Prepaid expenses and other current assets as costs to obtain a contract and these costs will be amortized to Subscriber acquisition costs over an average self-pay subscriber life of that OEM. As of January 1, 2018, we capitalized previously expensed loyalty payments of $10,156, net of tax, to Prepaid expenses and other current assets by reducing Accumulated deficit.

These changes do not have a material impact to our financial statements.

ASU 2018-02, Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. In February 2018, the FASB issued ASU 2018-02 to amend its standard on comprehensive income to provide an option for an entity to reclassify the stranded tax effects of the Tax Cuts and Jobs Act (the “Tax Act”) that was passed in December 2017 from accumulated other comprehensive income (“AOCI”) directly to retained earnings. The stranded tax effects result from the remeasurement of deferred tax assets and liabilities which were originally recorded in comprehensive income but whose remeasurement is reflected in the income statement. The guidance is effective for interim and fiscal years beginning after December 15, 2018, with early adoption permitted. We elected to early adopt ASU 2018-02 effective January 1, 2018 and reclassified the stranded tax effects due to the Tax Act of $4,013 related to the currency translation adjustment from our investment balance and note receivable with Sirius XM Canada from AOCI to Accumulated deficit.

The cumulative effect of the changes made to our consolidated balance sheet as of January 1, 2018 for the adoption of ASU 2014-09 and ASU 2018-02 are included in the table below.



	Balance at December 31, 2017			Adjustments Due to ASU 2014-09			Adjustments Due to ASU 2018-02			Balance at January 1, 2018
Balance Sheet
Assets
Prepaid expenses and other current assets	$	129,669		$	8,262		$	—		$	137,931
Other long-term assets	118,671			2,576			—			121,247
Deferred tax assets	505,528			(5,915		)	—			499,613

Liabilities:
Accounts payable and accrued expenses	794,341			32,399			—			826,740
Current portion of deferred revenue	1,881,825			(41,902		)	—			1,839,923
Deferred revenue	174,579			(3,990		)	—			170,589

Equity:
Accumulated deficit	(3,243,473		)	18,416			(4,013		)	(3,229,070		)
AOCI, net of tax	18,407			—			4,013			22,420

The following table illustrates the impact that adopting ASU 2014-09 has had on our reported results in the unaudited consolidated statement of comprehensive income. The adoption of ASU 2018-02 did not impact our unaudited consolidated statement of comprehensive income.



	For the Three Months Ended March 31, 2018
	As Reported			Impact of Adopting ASU 2014-09			Balances Without Adoption of ASU 2014-09
Income Statement
Revenues
Subscriber revenue	$	1,117,084		$	24,392		$	1,141,476

Expenses
Revenue share and royalties	310,132			22,069			332,201
Subscriber acquisition costs	122,693			1,046			123,739
Income tax expense	(80,249		)	(277		)	(80,526		)

Net Income	$	289,441		$	1,000		$	290,441

The adoption of the new revenue standard did not have a material impact to our unaudited consolidated balance sheet as of March 31, 2018.

ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash. In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash. This ASU updates the guidance related to the statement of cash flows and requires that the statement include restricted cash with cash and cash equivalents when reconciling beginning and ending cash. The guidance is effective for fiscal years beginning after December 15, 2017, including interim periods within that reporting period, and we adopted this ASU effective January 1, 2018. As a result of the adoption, we have added restricted cash to the reconciliation of beginning and ending cash and cash equivalents and included a reconciliation of total cash, cash equivalents and restricted cash to the balance sheet for each period presented in the unaudited consolidated statements of cash flows. Refer to the unaudited consolidated statements of cash flows for the impacts of this adoption.