Recently Issued Accounting Standards Not Yet Adopted
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. ASU No. 2014-09 will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. In March 2016, the FASB issued ASU No. 2016-08, Revenue from Contracts with Customers (Topic 606), Principal versus Agent Considerations (Reporting Revenue Gross versus Net), which clarifies how to apply the implementation guidance on principal versus agent considerations related to the sale of goods or services to a customer as updated by ASU No. 2014-09. ASU No. 2014-09 and ASU No. 2016-08 will become effective for the Company on January 1, 2018. ASU No. 2014-09 and ASU No. 2016-08 permit the use of either the retrospective or modified retrospective method.
The Company has analyzed the impact of Topic 606 on its revenue contracts which primarily include bundled energy and incentive sales through PPAs, individual REC sales, and upfront sales of federal & state incentive benefits recorded as deferred revenue and accreted into revenue. The Company has determined to apply a modified retrospective approach with a cumulative adjustment to accumulated deficit as of January 1, 2018 for changes to revenue recognition resulting from Topic 606 adoption.
The Company accounts for the majority of its PPAs as operating leases under ASC 840, Leases and recognizes rental income as revenue when the electricity is delivered. The Company has elected not to early adopt ASC 842, Leases in fiscal 2018 and therefore these PPAs are currently being evaluated in anticipation of the new lease standard adoption in fiscal 2019. For the bundled PPAs under the scope of Topic 606 in fiscal 2018, we concluded there will be no material change to revenue recognition patterns from current accounting practice.
The Company has evaluated the impact of Topic 606 as it relates to the individual sale of RECs. In certain jurisdictions, there may be a lag between physical generation of the underlying energy and the transfer of RECs to the customer due to administrative processes imposed by state regulations. Under the Company’s current accounting policy, the revenue is recognized as the underlying electricity is generated if the sale has been contracted with the customer. Based on the framework in Topic 606, for a portion of the existing individual REC sale arrangements where the transfer of control to the customer is determined to occur upon the transfer of the RECs, the Company will initiate revenue recognition commensurate with the transfer of RECs to the customer as compared to the generation of the underlying energy under the current accounting policy. The adoption of Topic 606 is expected to result in an increase in accumulated deficit on January 1, 2018 of approximately $25 million. The Company expects the impact on its fiscal 2018 results of operations will be minimal.
The Company has evaluated the impact of Topic 606 as it relates to the upfront sale of ITCs through its lease pass-through fund arrangements. The Company has concluded that revenue related to the sale of ITCs through its lease pass-through arrangements will be recognized at the point in time when the related solar energy systems are placed in service. Currently, the Company recognizes this revenue evenly over the five-year ITC recapture period. The adoption of Topic 606 is anticipated to be material to fiscal 2018. The adjustment on January 1, 2018 from the adoption is expected to decrease accumulated deficit by approximately $41 million. The Company expects the impact on its fiscal 2018 results of operations to result in a decrease in non-cash deferred revenue recognition of approximately $16 million.
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which primarily changes the lessee's accounting for operating leases by requiring recognition of lease right-of-use assets and lease liabilities. The Company expects to adopt the standard on January 1, 2019. The issued guidance requires a modified retrospective transition approach, which requires entities to recognize and measure leases at the beginning of the earliest period presented. In January 2018, the FASB proposed amending the standard to give entities another option for transition. The proposed transition method would allow entities to initially apply the requirements of the standard in the period of adoption (January 1, 2019). The Company will assess this transition option if the FASB issues the revised standard. The Company expects to elect certain of the practical expedients permitted in the issued standard, including the expedient that permits the Company to retain its existing lease assessment and classification. In January 2018, the FASB issued additional guidance which provides another optional transition practical expedient that allows entities to not evaluate existing and expired land easements under the new guidance at adoption if they were not previously accounted for as leases. The Company is currently working through an adoption plan which includes the evaluation of lease contracts compared to the new standard. While the Company is currently evaluating the impact the new guidance will have on its financial position and results of operations, the Company expects to recognize lease liabilities and