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

9 Months Ended

Sep. 30, 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 September 30, 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:



	September 30, 2018						December 31, 2017
	Level 1	Level 2		Level 3	Total Fair Value		Level 1	Level 2		Level 3	Total Fair Value
Assets:
Pandora investment ^(a)	—	$	554,352	—	$	554,352	—	$	480,472	—	$	480,472
Liabilities:
Debt ^(b)	—	$	6,585,588	—	$	6,585,588	—	$	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 September 30, 2018 and December 31, 2017.

Accumulated Other Comprehensive Income (Loss)

Accumulated other comprehensive income of $12,448 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 and nine months ended September 30, 2018, we recorded foreign currency translation adjustment income (loss) of $7,854 and $(9,972) net of tax benefit (expense) of $(2,491) and $3,244, respectively. In addition, we reclassified stranded tax effects of $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, during the nine months ended September 30, 2018.

Recent Accounting Pronouncements

In August 2018, the Financial Accounting Standards Board (“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. The amendments in this ASU align the requirements for capitalizing implementation costs incurred in a hosting arrangement with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The implementation costs incurred in a hosting arrangement that is a service contract should be presented as a prepaid asset in the balance sheet and expensed over the term of the hosting arrangement to the same line item in the statement of income as the costs related to the hosting fees. The guidance in this ASU is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years, and early adoption is permitted including adoption in any interim period. The amendments should be applied either retrospectively or prospectively to all implementation costs incurred after adoption. This ASU will not have a material impact on our unaudited consolidated statements of operations.

In February 2016, 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. This ASU is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, and early adoption is permitted. In July 2018, the FASB issued ASU 2018-11, Leases (Topic 842) Targeted Improvements, amending certain aspects of the new leasing standard. The amendment allows an additional optional transition method whereby an entity records a cumulative effect adjustment to opening retained earnings in the year of adoption without restating prior periods. We plan to adopt this ASU on January 1, 2019 and elect the additional transition method and do not expect to record a cumulative effect adjustment to opening Accumulated deficit. We expect the adoption of ASU 2016-02 will result in the recognition of right-of-use assets and lease liabilities on our consolidated balance sheets for operating leases and will not materially impact our consolidated statements of operations or our debt.

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 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 and also has other immaterial impacts.

Revenue Share - Paid Trials

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, we recognized revenue share related to paid trial subscriptions as the Current portion of deferred revenue. Under the new revenue standard, we reclassified the revenue share related to paid trial subscriptions existing as of the date of adoption from Current portion of deferred revenue to Accounts payable and accrued expenses. For new paid trial subscriptions, the net amount of the paid trial subscription is recorded as deferred revenue and the portion of revenue share is 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, 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 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 adoption did not have any impact on our unaudited consolidated statement of comprehensive income.

ASU 2018-07, Compensation-Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting. In June 2018, the FASB issued ASU 2018-07 which simplifies the accounting for share-based payments made to nonemployees so that the accounting for such payments is substantially the same as those made to employees, with certain exceptions. Under this ASU, equity-classified share based awards to nonemployees will be measured at fair value on the grant date of the awards, entities will need to assess the probability of satisfying performance conditions if any are present, and awards will continue to be classified according to ASC 718 upon vesting which eliminates the need to reassess classification upon vesting, consistent with awards granted to employees, unless the award is modified after the service has been rendered, any other conditions necessary to earn the right to benefit from the instruments have been satisfied, and the nonemployee is no longer providing services. The guidance is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, and early adoption is permitted. We elected to early adopt ASU 2018-07 effective July 1, 2018 and remeasured our unsettled liability-classified nonemployee awards at their January 1, 2018 fair value by recording a retrospective cumulative effect adjustment to opening Accumulated deficit and reclassified our previously liability-classified awards to equity.

The cumulative effects of the changes made to our consolidated balance sheet as of January 1, 2018 for the adoption of ASU 2014-09, ASU 2018-02 and ASU 2018-07 are included in the table below.



	Balance at December 31, 2017			Adjustments Due to ASU 2014-09			Adjustments Due to ASU 2018-02			Adjustments Due to ASU 2018-07			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			—			(26,266		)	800,474
Current portion of deferred revenue	1,881,825			(41,902		)	—			—			1,839,923
Long-term deferred revenue	174,579			(3,990		)	—			—			170,589

Equity:
Additional paid-in capital	1,713,816			—			—			30,398			1,744,214
Accumulated deficit	(3,243,473		)	18,416			(4,013		)	(4,132		)	(3,233,202		)
AOCI, net of tax	18,407			—			4,013			—			22,420

The following tables illustrate the impacts of adopting ASU 2014-09 on our unaudited consolidated statement of comprehensive income.



	For the Three Months Ended September 30, 2018									For the Nine Months Ended September 30, 2018
	As Reported			Impact of Adopting ASU 2014-09			Balances Without Adoption of ASU 2014-09			As Reported			Impact of Adopting ASU 2014-09			Balances Without Adoption of ASU 2014-09
Income Statement
Revenues
Subscriber revenue	$	1,162,439		$	24,103		$	1,186,542		$	3,418,485		$	72,282		$	3,490,767

Expenses
Revenue share and royalties	343,015			22,743			365,758			1,057,431			67,047			1,124,478
Subscriber acquisition costs	109,469			902			110,371			351,940			2,748			354,688
Income tax expense	(11,525		)	(15		)	(11,540		)	(162,344		)	(371		)	(162,715		)

Net Income	$	343,048		$	443		$	343,491		$	924,841		$	2,116		$	926,957

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 was effective for fiscal years beginning after December 15, 2017, including interim periods within that reporting period. 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.