Annual report pursuant to Section 13 and 15(d)

Note 2 - Significant Accounting Policies

v3.19.3
Note 2 - Significant Accounting Policies
12 Months Ended
Sep. 28, 2019
Notes to Financial Statements  
Significant Accounting Policies [Text Block]
Note 
2—Significant
Accounting Policies
 
(a) Basis of Presentation:
Our consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States of America ("GAAP") and include the accounts of Delta Apparel and its wholly-owned domestic and foreign subsidiaries, as well as its majority-owned subsidiary, Salt Life Beverage, LLC ("Salt Life Beverage"). In
January 2018,
Delta Apparel, Inc. established Salt Life Beverage, of which Delta Apparel, through its subsidiary, holds a
60%
ownership interest.  Salt Life Beverage was formed to manufacture, market and sell Salt Life-branded alcoholic beverage products. We have concluded we have a controlling financial interest in Salt Life Beverage and have consolidated its results in accordance with Accounting Standards Codification ("ASC") ASC-
810,
Consolidations,
and Accounting Standards Update ("ASU") 
No.
2015
-
02
, Consolidation (Topic
810
); Amendments to Consolidations
.  The non–controlling interest represents the
40%
proportionate share of the results of Salt Life Beverage. All significant intercompany accounts and transactions have been eliminated in consolidation. 
 
We operate our business in
two
distinct segments: Delta Group and Salt Life Group.  Although the
two
segments are similar in their production processes and regulatory environments, they are distinct in their economic characteristics, products, marketing, and distribution methods.
 
(b) Fiscal Year: 
We operate on a
52
-
53
week fiscal year ending on the Saturday closest to
September 30.
All references to
"2019"
and
"2018"
relate to the
52
week fiscal years ended on
September 28, 2019,
and
September 29, 2018,
respectively.
 
(c) Use of Estimates:
The preparation of financial statements in conformity with GAAP requires management to make certain estimates and assumptions that affect the reported amounts and disclosures of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Estimates are adjusted to reflect actual experience when necessary. Significant estimates and assumptions affect many items in our financial statements, such as allowance for doubtful accounts receivable, refund liabilities, inventory obsolescence, the carrying value of goodwill, and income tax assets and related valuation allowance. Our actual results
may
differ from our estimates.
 
(d) Cash and Cash Equivalents:
Cash and cash equivalents consists of cash and temporary investments with original maturities of
three
months or less.
 
(e) Accounts Receivable:
Accounts receivable consists primarily of receivables from our customers arising from the sale of our products, and we generally do
not
require collateral from our customers.  We actively monitor our exposure to credit risk through the use of credit approvals and credit limits. Accounts receivable is presented net of reserves for doubtful accounts.
 
We estimate the net collectibility of our accounts receivable and establish an allowance for doubtful accounts based upon this assessment.  In situations where we are aware of a specific customer’s inability to meet its financial obligation, such as in the case of a bankruptcy filing, we assess the need for a specific reserve for bad debts. Reserves are determined through analysis of the aging of accounts receivable balances, historical bad debts, customer concentrations, customer credit-worthiness, current economic trends and changes in customer payment terms.  Bad debt expense was less than
1%
of net sales in each of fiscal years
2019
and
2018.
 
(f) Inventories:
  We state inventories at the lower of cost or net realizable value using the
first
-in,
first
-out method.  Inventory cost includes materials, labor and manufacturing overhead on manufactured inventory, and all direct and associated costs, including inbound freight, to acquire sourced products. See Note
2
(y) for further information regarding yarn procurements.  We regularly review inventory quantities on hand and record reserves for obsolescence, excess quantities, irregulars and slow-moving inventory based on historical selling prices, current market conditions, and forecasted product demand to reduce inventory to its net realizable value.
 
(g) Property, Plant and Equipment:
Property, plant and equipment are stated at cost. We depreciate and amortize our assets on a straight-line method over the estimated useful lives of the assets, which range from
three
to
twenty-five
years. Leasehold improvements are amortized over the shorter of the lease term or the estimated useful life of the improvements. Assets that we acquire under non-cancelable leases that meet the criteria of capital leases are capitalized in property, plant and equipment and amortized over the useful lives of the related assets. When we retire or dispose of assets, the costs and accumulated depreciation or amortization are removed from the respective accounts, and we recognize any related gain or loss. Repairs and maintenance costs are charged to expense when incurred. Major replacements that substantially extend the useful life of an asset are capitalized and depreciated.
 
(h) Internally Developed Software Costs:
 We account for internally developed software in accordance with ASC 
350
-
40,
Intangibles-Goodwill and Other, Internal-Use Software
. After technical feasibility has been established, we capitalize the cost of our software development process, including payroll and payroll benefits, by tracking the software development hours invested in the software projects. We amortize our software development costs in accordance with the estimated economic life of the software, which is generally
three
to
ten
years.
 
(i) Impairment of Long-Lived Assets (Including Amortizable Intangible Assets):
In accordance with ASC 
360,
Property, Plant, and Equipment
, our long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets
may
not
be recoverable. When evaluating assets for potential impairment, we compare the carrying amount of the asset to the undiscounted future net cash flows expected to be generated by the asset. If impairment is indicated, the asset is permanently written down to its estimated fair value and an impairment loss is recognized.
 
(j) Goodwill and Intangible Assets:
We recorded goodwill and intangible assets with definite lives, including trade names and trademarks, customer relationships, technology, and non-compete agreements, as a result of several acquisitions. Intangible assets are amortized based on their estimated economic lives, ranging from
four
to
twenty
years.  Goodwill represents the excess of the purchase price over the fair value of net identified tangible and intangible assets acquired and liabilities assumed, and is
not
amortized. The total amount of goodwill is expected to be deductible for tax purposes.  See Note
6
— Goodwill and Intangible Assets for further details.
 
(k) Impairment of Goodwill:
We evaluate the carrying value of goodwill annually or more frequently if events or circumstances indicate that an impairment loss
may
have occurred. Such circumstances could include, but are
not
limited to, a significant adverse change in business climate, increased competition or other economic conditions.
 
We complete our annual impairment test of goodwill on the
first
day of our
third
fiscal quarter. We estimate fair value of the applicable reporting unit or units using a discounted cash flow methodology. This methodology represents a level
3
fair value measurement as defined under ASC
820,
Fair Value Measurements and Disclosures
, since the inputs are
not
readily observable in the marketplace. The goodwill impairment testing process involves the use of significant assumptions, estimates and judgments, including projected sales, gross margins, selling, general and administrative expenses, and capital expenditures, and the selection of an appropriate discount rate, all of which are subject to inherent uncertainties and subjectivity.  When we perform goodwill impairment testing, our assumptions are based on annual business plans and other forecasted results, which we believe represent those of a market participant.  We select a discount rate, which is used to reflect market-based estimates of the risks associated with the projected cash flows based on the best information available as of the date of the impairment assessment. Based on the annual impairment analysis, there is
not
an impairment on the goodwill recorded in our financial statements.
 
Given the current macro-economic environment and the uncertainties regarding its potential impact on our business, there can be
no
assurance that our estimates and assumptions used in our impairment tests will prove to be accurate predictions of the future. If our assumptions regarding forecasted cash flows are
not
achieved, it is possible that an impairment review
may
be triggered and goodwill
may
be impaired.
 
(l) Contingent Consideration:
At the end of each reporting period, we are required to remeasure the fair value of the contingent consideration related to the Salt Life and
DTG2Go
acquisitions in
August 
2013
and
March 
2018,
respectively. We remeasure contingent consideration in accordance with ASC
805,
Business Combinations
based on historical operating results and projections for the future. The estimated fair value of the contingent consideration for Salt Life was
$0.2
million and
$1.3
million at
September 28, 2019,
and
September 29, 2018,
respectively. The
DTG2Go
contingent consideration was valued at
$8.9
million and
$9.2
million at
September 28, 2019
and
September 29, 2018,
respectively.
 
(m) Revenue Recognition:
  Revenue is recognized when performance obligations under the terms of the contracts are satisfied. Our performance obligation primarily consists of delivering products to our customers. Control is transferred upon providing the products to customers in our retail stores, upon shipment of our products to the consumers from our ecommerce sites, and upon shipment from our distribution centers to our customers in our wholesale operations. Once control is transferred to the customer, we have completed our performance obligation.
 
Our receivables resulting from wholesale customers are generally collected within
two
months, in accordance with our established credit terms. Our direct-to-consumer ecommerce and retail store receivables are collected within a few days. Our revenue, including freight income, is recognized net of applicable taxes in our Consolidated Statements of Operations.
 
In certain areas of our wholesale business, we offer discounts and allowances to support our customers. Some of these arrangements are written agreements, while others
may
be implied by customary practices in the industry. Wholesale sales are recorded net of discounts, allowances, and operational chargebacks. As certain allowances and other deductions are
not
finalized until the end of a season, program or other event which
may
not
have occurred, we estimate such discounts, allowances, and returns that we expect to provide.
 
We only recognize revenue to the extent that it is probable that we will
not
recognize a significant reversal of revenue when the uncertainties related to the variability are ultimately resolved. In determining our estimates for discounts, allowances, chargebacks, and returns, we consider historical and current trends, agreements with our customers and retailer performance. We record these discounts, returns and allowances as a reduction to net sales in our Consolidated Statements of Operations and as a refund liability in our accrued expenses in our Consolidated Balance Sheets, with the estimated value of inventory expected to be returned in prepaid and other current assets in our Consolidated Balance Sheets. As of
September 28, 2019,
there was
$1.0
million in refund liabilities for customer returns, allowances, markdowns and discounts within accrued expenses.
 
We record shipping and handling charges incurred by us before and after the customer obtains control as a fulfillment cost rather than an additional promised service. Our customers' terms are less than
one
year from the transfer of goods, and we do
not
adjust receivable amounts for the impact of the time value of money. We do
not
capitalize costs of obtaining a contract which we expect to recover, such as commissions, as the amortization period of the asset recognized would be
one
year or less. 
 
Royalty revenue is primarily derived from royalties paid to us by licensees of our intellectual property rights, which include, among other things, trademarks and copyrights.  We execute license agreements with our licensees detailing the terms of the licensing arrangement. Royalties are generally recognized upon receipt of the licensee's royalty report in accordance with the terms of the executed license agreement and when all other revenue recognition criteria have been met.
 
Our revenue streams consist of wholesale, direct-to-consumer ecommerce and retail stores which are included in our Consolidated Statements of Operations. The table below identifies the amount and percentage of net sales by distribution channel (in thousands):
 
   
Fiscal Year Ended
 
   
September 28, 2019
   
September 29, 2018
 
   
$
   
%
   
$
   
%
 
Retail
  $
4,396
     
1
%   $
3,560
     
1
%
Direct-to-consumer ecommerce
   
5,526
     
1
%    
5,339
     
1
%
Wholesale
   
421,808
     
98
%    
386,551
     
98
%
Net Sales
  $
431,730
     
100
%   $
395,450
     
100
%
 
The table below provides net sales by reportable segment (in thousands) and the percentage of net sales by distribution channel for each reportable segment:
 
   
Fiscal Year Ended September 28, 2019
 
   
Net Sales
   
Retail
   
Direct-to-Consumer ecommerce
   
Wholesale
 
Delta Group
  $
389,075
     
0.3
%    
0.3
%    
99.4
%
Salt Life Group
   
42,655
     
7.6
%    
9.9
%    
82.5
%
Total
  $
431,730
     
 
     
 
     
 
 
 
   
Fiscal Year Ended September 29, 2018
 
   
Net Sales
   
Retail
   
Direct-to-Consumer ecommerce
   
Wholesale
 
Delta Group
  $
356,009
     
0.3
%    
0.4
%    
99.3
%
Salt Life Group
   
39,441
     
6.2
%    
10.3
%    
83.5
%
Total
  $
395,450
     
 
     
 
     
 
 
 
(n) Sales Tax:
Sales tax collected from customers and remitted to various government agencies are presented on a net basis (excluded from revenues) in the Consolidated Statements of Operations.
 
(o) Cost of Goods Sold:
We include all manufacturing and sourcing costs incurred prior to the receipt of finished goods at our distribution facilities in cost of goods sold. The cost of goods sold principally includes product costs, purchasing costs, inbound freight charges, insurance, inventory write-downs, and depreciation and amortization expense associated with our manufacturing and sourcing operations. Our gross margins
may
not
be comparable to other companies, since some entities
may
include costs related to their distribution network in cost of goods sold, and we include them in selling, general and administrative expenses.
 
(p) Selling, General and Administrative Expense:
We include in selling, general and administrative expenses costs incurred subsequent to the receipt of finished goods at our distribution facilities, such as the cost of stocking, warehousing, picking and packing, and shipping goods for delivery to our customers. Distribution costs included in selling, general and administrative expenses totaled
$17.6
million and 
$16.9
million in fiscal years
2019
and
2018,
respectively. In addition, selling, general and administrative expenses include costs related to sales associates, administrative personnel, advertising and marketing expenses, royalty payments on licensed products, and other general and administrative expenses.
 
(q) Advertising Costs:
All costs associated with advertising and promoting our products are expensed during the period in which they are incurred and are included in selling, general and administrative expenses in the Consolidated Statements of Operations. We participate in cooperative advertising programs with some of our customers. Depending on the customer, our defined cooperative programs allow the customer to use from
2%
to
5%
of its net purchases from us towards advertisements of our products. Because our products are being specifically advertised, we are receiving an identifiable benefit resulting from the consideration for cooperative advertising. We record cooperative advertising costs as a selling expense and the related cooperative advertising reserve as an accrued liability. Advertising costs totaled
$4.7
million and
$4.0
million in fiscal years
2019
and
2018,
respectively. Included in these costs were
$0.8
million and
$0.7
million in fiscal years
2019
and
2018,
respectively, related to our cooperative advertising programs.
 
(r) Stock-Based Compensation:
   Stock-based compensation is accounted for under the provisions of ASC
718,
Compensation – Stock Compensation,
 which requires all stock-based payments to employees, including grants of employee stock options, to be recognized as expense over the vesting period using a fair value method. The fair value of our restricted stock awards is the quoted market value of our stock on the grant date. For performance-based stock awards, in the event we determine it is
no
longer probable that we will achieve the minimum performance criteria specified in the award, we reverse all of the previously recognized compensation expense in the period such a determination is made.  We recognize the fair value, net of estimated forfeitures, as a component of selling, general and administrative expense in the Consolidated Statements of Operations over the vesting period.
 
(s) Income Taxes:
We account for income taxes pursuant to ASC
740,
Income Taxes
, under the 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 years 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 rates is recognized in income in the period that includes the enactment date.
 
(t) Earnings per Share:
We compute basic earnings per share ("EPS") by dividing net income by the weighted average number of common shares outstanding during the year pursuant to ASC
260,
Earnings Per Share
(“ASC
260”
). Basic EPS includes
no
dilution.  Diluted EPS is calculated, as set forth in ASC
260,
by dividing net income by the weighted average number of common shares outstanding adjusted for the issuance of potentially dilutive shares. Potential dilutive shares consist of common stock issuable under the assumed exercise of outstanding stock options and awards using the treasury stock method. This method assumes that the potential common shares are issued and the proceeds from the exercise, along with the amount of compensation expense attributable to future services, are used to purchase common stock at the exercise date. The difference between the number of potential shares issued and the number of shares purchased is added as incremental shares to the actual number of shares outstanding to compute diluted EPS. Outstanding stock options and awards that result in lower potential shares issued than shares purchased under the treasury stock method are
not
included in the computation of diluted EPS since their inclusion would have an anti-dilutive effect on EPS.
 
(u) Foreign Currency Translation:
Our functional currency for our foreign operated manufacturing facilities is the United States dollar. We remeasure those assets and liabilities denominated in foreign currencies using exchange rates in effect at each balance sheet date.   Property, plant and equipment and the related accumulated depreciation or amortization are recorded at the exchange rates in effect on the date we acquired the assets. Revenues and expenses denominated in foreign currencies are remeasured using average exchange rates during the period transacted. We recognize the resulting foreign exchange gains and losses as a component of other income, net in the Consolidated Statements of Operations. These gains and losses are immaterial for all periods presented.
 
(v) Fair Value of Financial Instruments:
We use financial instruments in the normal course of our business. The carrying values approximate fair values for financial instruments that are short-term in nature, such as cash, accounts receivable and accounts payable. We estimate that the carrying value of our long-term fixed rate debt approximates fair value based on the current rates offered to us for debt of the same remaining maturities.
 
(w) Other Comprehensive Income:
Other Comprehensive Income consists of net earnings and unrealized gains from cash flow hedges, net of tax. Accumulated other comprehensive (loss) income ("AOCI") contained in the shareholders’ equity section of the Consolidated Balance Sheets related to interest rate swap agreements and was a loss of
$1.0
million as of
September 28, 2019,
and income of
$0.1
million as of
September 29, 2018.
 
(
x
) Yarn and Cotton Procurements:
We have a supply agreement with Parkdale Mills, Inc. and Parkdale America, LLC, (collectively "Parkdale"), to supply our yarn requirements that has been in place since
2005,
with our existing agreement running through 
December 31, 2021.
Under the supply agreement, we purchase from Parkdale all of our yarn requirements for use in our manufacturing operations, excluding yarns that Parkdale does
not
manufacture or cannot manufacture due to temporary capacity constraints. The purchase price of yarn is based upon the cost of cotton plus a fixed conversion cost.   Thus, we are subject to the commodity risk of cotton prices and cotton price movements, which could result in unfavorable yarn pricing for us. We fix the cotton prices as a component of the purchase price of yarn, pursuant to the supply agreement, in advance of the shipment of finished yarn from Parkdale.  Prices are set according to prevailing prices, as reported by the New York Cotton Exchange, at the time we elect to fix specific cotton prices.
  
 
(y) Derivatives:
From time to time we enter into forward contracts, option agreements or other instruments to limit our exposure to fluctuations in interest rates and raw material prices with respect to long-term debt and cotton purchases, respectively. We determine at inception whether the derivative instruments will be accounted for as hedges.
 
We account for derivatives and hedging activities in accordance with ASC 
815,
Derivatives and Hedging,
 as amended.  ASC
815
establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts and hedging activities. It requires the recognition of all derivative instruments as either assets or liabilities in the Consolidated Balance Sheets and measurement of those instruments at fair value. The accounting treatment of changes in fair value depends upon whether or
not
a derivative instrument is designated as a hedge and, if so, the type of hedge. We include all derivative instruments at fair value in our Consolidated Balance Sheets.  For derivative financial instruments related to the production of our products that are
not
designated as a hedge, we recognize the changes in fair value in cost of sales. For derivatives designated as cash flow hedges, to the extent effective, we recognize the changes in fair value in accumulated other comprehensive income (loss) until the hedged item is recognized in income.  Any ineffectiveness in the hedge is recognized immediately in income in the line item that is consistent with the nature of the hedged risk. We formally document all relationships between hedging instruments and hedged items, as well as risk management objectives and strategies for undertaking various hedge transactions, at the inception of the transactions.
 
We are exposed to counterparty credit risks on all derivatives. Because these amounts are recorded at fair value, the full amount of our exposure is the carrying value of these instruments. We only enter into derivative transactions with well-established institutions and therefore we believe the counterparty credit risk is minimal.
 
From time to time, we
may
purchase cotton option contracts to economically hedge the risk related to market fluctuations in the cost of cotton used in our operations. We do
not
receive hedge accounting treatment for these derivatives. As such, the realized gains and losses associated with them were recorded within cost of goods sold on the Consolidated Statement of Operations. There were
no
raw material option agreements outstanding at
September 28, 2019
or
September 29, 2018.
 
The table below indicates information on our outstanding interest rate swap agreements during fiscal years
2019
and
2018:
 
 
Effective Date
 
Notational Amount
 
LIBOR Rate
 
Maturity Date
Interest Rate Swap
July 19, 2017
 
$10 million
 
1.99%
 
May 10, 2021
Interest Rate Swap
July 25, 2018
 
$20 million
 
3.18%
 
July 25, 2023
 
During fiscal years
2019
and
2018,
these interest rate swap agreements had minimal ineffectiveness and were considered highly effective hedges.
 
The changes in fair value of the interest rate swap agreements resulted in AOCI (loss) gain, net of taxes, of (
$1.1
million) and
$0.2
million for the years ended
September 28, 2019,
and
September 29, 2018,
respectively.  See Note
15
(d) - Fair Value Measurements for further details.
 
(z) Equity Method Accounting:
As of
September 28, 2019,
we owned
31%
of the outstanding capital stock in our Honduran equity method investment. We apply the equity method of accounting for our investment, as we have less than a
50%
ownership interest and can exert significant influence. We do
not
exercise control over this company and do
not
have substantive participating rights. As such, this entity is
not
considered a variable interest entity.
 
(aa) Net Income Attributable to Non-Controlling Interest:
The net income attributable to non-controlling interest represents the share of net income allocated to members of our consolidated affiliates.
 
(ab) Business Combinations:
Business combinations completed by Delta Apparel have been accounted for under the acquisition method of accounting. The acquisition method requires the assets acquired and liabilities assumed, including contingencies, to be recorded at the fair value determined at the acquisition date and changes thereafter recorded in income. We generally obtain independent
third
-party valuation studies for certain assets acquired and liabilities assumed to assist us in determining the fair value. Goodwill represents the purchase price over the fair value of tangible and intangible assets acquired and liabilities assumed. The results of acquired businesses are included in our results of operations from the date of acquisition.
 
(ac) Capital Leases:
We classify leases as capital or operating leases in accordance with ASC
840,
 
Leases
. We account for a lease that transfers substantially all of the benefits and risks incidental to ownership of property as a capital lease. At the inception of a capital lease, we record an asset and payment obligation at an amount equal to the lesser of the present value of the minimum lease payments and the property's fair market value. All other leases are accounted for as operating leases, and the related lease payments are charged to expenses as incurred.
 
(ad) Recently Adopted Accounting Pronouncements:
 In
May 2014,
the FASB issued ASU
2014
-
19,
Revenue from Contracts with Customers
("ASU
2014
-
09"
), which replaced the existing revenue recognition guidance in U.S. GAAP. Since the issuance of ASU
2014
-
09,
the FASB released several amendments to improve and clarify the implementation guidance, as well as to change the effective date. These standards have been collectively codified within ASC
606,
Revenue from Contracts with Customers
("ASC
606"
). ASC
606
outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers. The standard also requires additional disclosures about the nature, timing, and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in those judgments.
 
We adopted ASC
606
effective
October 1, 2018
using the modified retrospective method. We applied the standard to all contracts as of the transition date. Information for prior years has
not
been retrospectively adjusted and continues to reflect the authoritative accounting standards in effect for those periods.
 
With the adoption of ASC
606,
the timing of revenue recognition for our primary revenue streams remained substantially unchanged, with
no
material effect on net sales. See the table below (in thousands) for the effect of the adoption of the standard on our Consolidated Balance Sheet as of
September 28, 2019
due to the change in recording provisions for customer refunds as a liability instead of netted against trade accounts receivable.
 
   
As Reported
     
 
 
 
Balances
 
   
September 28, 2019
   
Effect of Standard
   
without Adoption
 
Accounts receivable, net
   
59,337
     
(682
)    
58,655
 
Prepaid expenses and other current assets
   
2,999
     
(155
)    
2,844
 
Total Current Assets
   
243,598
     
(837
)    
242,761
 
Total assets
   
377,988
     
(837
)    
377,151
 
Accrued expenses
   
20,791
     
(1,047
)    
19,744
 
Total current liabilities
   
88,875
     
(1,047
)    
87,828
 
Total liabilities
   
224,100
     
(1,047
)    
223,053
 
Total liabilities and equity
   
377,988
     
(1,047
)    
376,941
 
 
(ae) Recently Issued Accounting Pronouncements
Not
Yet Adopted:
 
In
February 2016,
the FASB issued ASU
No.
2016
-
02,
 
Leases, 
("ASU
2016
-
02"
) which is codified in ASC
842,
Leases
. ASC
842
requires lessees to recognize assets and liabilities for most leases. All leases will be required to be recorded on the balance sheet with the exception of short-term leases. The standard allows entities to present the effects of the accounting change as either a cumulative adjustment as of the beginning of the earliest period presented or as of the date of adoption. ASC
842
is effective for financial statements issued for annual periods beginning after
December 15, 2018,
and interim periods within those annual periods, with early application permitted. ASC
842
will, therefore, be adopted in our 
first
quarter of the fiscal year beginning 
September 29, 2019 (
fiscal year
2020
).
 
We have an implementation team tasked with reviewing our lease obligations and determining the impact of the new standard to our financial statements. The team is also tasked with identifying appropriate changes to our business processes, systems, and controls to support recognition and disclosure under the new standard. The implementation team reports its findings and progress of the project to management on a frequent basis and to the Audit Committee of the Board of Directors on a quarterly basis. We have identified contracts with potential leasing arrangements, entered leases into a tracking and accounting software, and are analyzing the results of the impact of adoption. Based on our current lease portfolio, we preliminarily expect ASC
842
to have a material impact on our consolidated balance sheets primarily related to the recognition of operating lease assets and liabilities. However, we do
not
expect the standard to have a material impact on our consolidated statements of operations, comprehensive income, or cash flows. Further details regarding our undiscounted future lease payments as well as the timing of those payments are included within Note
10
 - Leases.
In
August 2017,
the FASB issued ASU
No.
2017
-
12,
Derivatives and Hedging (Topic
815
): Targeted Improvements to Accounting for Hedging Activities
, ("ASU
2017
-
12"
). The amendments in ASU
2017
-
12
apply to any entity that elects to apply hedge accounting in accordance with U.S. GAAP. ASU
2017
-
12
permits more flexibility in hedging interest rate risk for both variable rate and fixed rate financial instruments, and the ability to hedge risk components for nonfinancial hedges. In addition, this ASU requires an entity to present the earnings effect of hedging the instrument in the same income statement line in which the earnings effect of the hedge item is reported. In addition, companies
no
longer need to separately measure and report hedge ineffectiveness and can use an amortization approach or continue with mark-to-market accounting. ASU
2017
-
12
is effective for financial statements issued for fiscal years beginning after
December 15, 2018,
and interim periods within those annual periods. ASU
2017
-
12
will be adopted in the
first
quarter of our fiscal year beginning 
September 29, 2019 (
fiscal year
2020
). The provisions of ASU
2017
-
12
are
not
anticipated to have a material effect on our financial condition, results of operations, cash flows or disclosures.
In
January 2017,
the FASB issued ASU
2017
-
04,
Intangibles - Goodwill and other (Topic
350
), Simplifying the Test for Goodwill Impairment
, ("ASU
2017
-
04"
). To simplify the subsequent measurement of goodwill, ASU
2017
-
04
eliminates Step
2
from the goodwill impairment test. In computing the implied fair value of goodwill under Step
2,
an entity had to perform procedures to determine the fair value at the impairment testing date of its assets and liabilities (including unrecognized assets and liabilities) following the procedure that would be required in determining the fair value of assets acquired and liabilities assumed in a business combination. Instead, under the amendments in ASU
2017
-
04,
an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should
not
exceed the total amount of goodwill allocated to that reporting unit. Additionally, an entity should consider income tax effects from any tax deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss, if applicable. ASU
2017
-
04
also eliminates the requirements for any reporting unit with a
zero
or negative carrying amount to perform a qualitative assessment and, if it fails that qualitative test, to perform Step
2
of the goodwill impairment test. Therefore, the same impairment assessment applies to all reporting units. An entity is required to disclose the amount of goodwill allocated to each reporting unit with a
zero
or negative carrying amount of net assets. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. ASU
2017
-
04
is effective for financial statements issued for annual and interim periods beginning after
December 15, 2019. 
ASU
2017
-
04
will therefore be effective in our fiscal year beginning
October 4, 2020 (
fiscal year
2021
). The provisions of ASU
2017
-
04
are
not
anticipated to have a material effect on our financial condition, results of operations, cash flows or disclosures.