The locations in Lincolnshire, Illinois; Gurgaon, India; The Woodlands, Texas; Orlando, Florida; and Charlotte, North Carolina, are primarily dedicated to our HR Solutions segment. The other locations listed above house personnel from both of our reportable segments.
As described in Note 1 “Basis of Presentation - Revision of Previously Issued Financial Statements” of the Notes to Consolidated Financial Statements, during the fourth quarter of 2016, we identified errors that impacted the years ended December 31, 2015, 2014, 2013, and 2012. The corrections for the errors, which we have concluded are immaterial, individually and in the aggregate, to all prior-period consolidated financial statements, are reflected in the consolidated financial statements and selected financial data included in this Form 10-K.
During 2016, we continued to face headwinds that adversely impacted our business. In our Risk Solutions segment, these headwinds included adverse changes in foreign currency exchange rates, economic weakness in certain regions around the globe and a negative market impact in our Reinsurance business. In our HR Solutions segment, these headwinds included price compression in our benefits administration business and economic weakness in certain regions around the globe.
Operating expenses decreased $113 million, or 1%, to $9.7 billion in 2016 due primarily to a $248 million favorable impact from changes in foreign currency exchange rates, a $176 million decrease in expenses related to legacy litigation incurred in the prior year, a $144 million decrease in the core expense base resulting from acquisitions, net of divestitures, and a $37 million decrease in intangible asset amortization, partially offset by $220 million of non-cash expenses related to certain pension settlements, an increase in expense associated with 3% organic revenue growth, and $15 million of transaction costs incurred related to future portfolio repositioning activities.
Net income attributable to Aon shareholders was $1.4 billion, an increase of $11 million, or 1%, from 2015. Diluted earnings per share increased 6% to $5.16 in 2016 from $4.88 in 2015.
Cash flow provided by operating activities was $2.3 billion in 2016, an increase of $317 million, or 16%, from $2.0 billion in 2015, due primarily to an increase in underlying net income after adjusting for certain non-cash pension expenses, lower cash pension contributions, and lower cash tax payments.
We focus on four key non-GAAP metrics that we communicate to shareholders: organic revenue growth, adjusted operating margins, adjusted diluted earnings per share, and free cash flow. The following is our measure of performance against these four metrics for 2016:
Free cash flow, a non-GAAP metric as defined under the caption “Review of Consolidated Results - Free Cash Flow,” was $2.1 billion in 2016, an increase of $385 million, or 22%, from $1.7 billion in 2015. The increase in free cash flow from the prior year was driven by record cash flow from operations of $2.3 billion and a 23%, or $68 million, decrease in capital expenditures.
As described in Note 1 “Basis of Presentation - Revision of Previously Issued Financial Statements” of the Notes to Consolidated Financial Statements, during the fourth quarter of 2016, we identified errors that impacted the years ended December 31, 2015 and 2014. The corrections for the errors, which we have concluded are immaterial, individually and in the aggregate, to all prior-period consolidated financial statements, are reflected herein.
Revenue decreased by $55 million, to $11.6 billion in 2016, compared to $11.7 billion in 2015. The decrease was driven by a 2% impact from unfavorable foreign exchange rates and a 2% decrease in commissions and fees related to acquisitions, net of
Interest expense, which represents the cost of our worldwide debt obligations, increased $9 million, or 3%, from 2015. The increase in interest expense primarily reflects an increase in total debt outstanding.
The effective tax rate on net income was 14.3% in 2016 and 15.8% in 2015. The 2016 and 2015 rates reflect changes in the geographical distribution of income, the impact from certain pension settlements in the second and fourth quarters of 2016, a reduction in U.S. income resulting from the settlement of legacy litigation in the second quarter of 2015, and the impact of certain discrete items.
Other general expenses decreased $68 million in 2015, or 2%, compared to 2014 due largely to a $166 million favorable impact from changes in foreign currency exchange rates and a $38 million decrease in intangible amortization, partially offset by a $102 million increase in expense related to legacy litigation, and an increase in expense to support 3% organic revenue growth.
Interest income represents income earned on Cash and cash equivalents and Short-term investments. It does not include interest earned on funds held on behalf of clients. Interest income increased $4 million in 2015, or 40%, from 2014, due to marginally higher average interest rates globally.
Interest expense, which represents the cost of our worldwide debt obligations, increased $18 million in 2015, or 7%, from 2014. The increase in interest expense primarily reflects an increase in total debt outstanding.
Income before income taxes was $1.7 billion in 2015, a decrease of $76 million, or 4%, from $1.8 billion in 2014 due to drivers identified above.
The effective tax rate on net income was 15.8% in 2015 and 18.9% in 2014. The 2015 and 2014 tax rates reflect changes in the geographical distribution of income, a reduction in U.S. income resulting from the settlement of a legacy litigation matter in the second quarter of 2015, and the impact of certain discrete items.
In our discussion of operating results, we sometimes refer to certain non-GAAP supplemental information derived from consolidated financial information specifically related to organic revenue growth, adjusted operating margin, adjusted diluted earnings per share, free cash flow, and the impact of foreign exchange rate fluctuations on operating results. This non-GAAP supplemental information should be viewed in addition to, not instead of, our Consolidated Financial Statements and Notes thereto.
The effective tax rates used in the U.S. GAAP financial statements were 14.3% and 15.8% for the twelve months ended December 31, 2016 and 2015, respectively. Excluded items are generally taxed at the effective tax rate. However, after adjusting the underlying annual tax rate to exclude the impact associated with certain non-cash pension settlements in the second and fourth quarters of 2016 and expenses for legacy litigation in the second quarter of 2015, the adjusted effective tax rates for the full years 2016 and 2015 were 16.8% and 17.9%, respectively.
Reconciliations of this non-GAAP measure to the reported diluted earnings per share are as follows (in millions, except per share data):
We conduct business in more than 120 countries, and, because of this, foreign currency exchange rate fluctuations have a significant impact on our business. Foreign currency exchange rate movements may be significant and may distort true period-to-period comparisons of changes in revenue or pretax income. Therefore, to give financial statement users meaningful information about our operations, we have provided an illustration of the impact of foreign currency exchange rate fluctuations on our financial results. The methodology used to calculate this impact isolates the impact of the change in currencies between periods by translating the last year’s revenue, expenses, and net income using the current year’s foreign currency exchange rates.
Translating prior year results at current year foreign currency exchange rates, currency fluctuations had a favorable impact of $0.01 on diluted earnings per share during the year ended December 31, 2016; currency fluctuations had unfavorable impacts of $0.38 and $0.11 on diluted earnings per share in the years ended 2015 and 2014, respectively, when prior year results were translated at rates prevalent in those years. Currency fluctuations had unfavorable impacts of $0.01, $0.41, and $0.11 on diluted earnings per share in the years ended December 31, 2016, 2015, and 2014, respectively, when prior year results were translated at rates prevalent in those years. These translations are performed for comparative purposes only and do not impact the accounting policies or practices for amounts included in the Consolidated Financial Statements and Notes thereto.
Cash used for investing activities in 2016 was $954 million. The primary drivers of the cash used for investing activities were $879 million for acquisitions of businesses, net of cash acquired, $222 million for capital expenditures, and $21 million of net purchases of long-term investments, partially offset by $107 million of sale of businesses and $61 million of net sales of short-term investments.
Cash used for investing activities in 2015 was $138 million. The primary drivers of the cash flow used for investing activities were $290 million for capital expenditures, $46 million of net purchases of long-term investments, and $16 million for acquisitions of businesses, net of cash acquired, partially offset by sales of businesses of $205 million and net sales of short-term investments of $9 million.
Cash used for investing activities in 2014 was $545 million. The primary drivers of the cash used for investing activities were $479 million for acquisitions of businesses, net of cash acquired, and $256 million for capital expenditures, partially offset by net sales of long-term investments, sale of businesses of $48 million, and net sales of short-term investments of $32 million.
Cash used for financing activities during 2015 was $1.7 billion. The primary drivers of the cash flow used for financing activities were share repurchases of $1.6 billion, dividends paid to shareholders of $323 million, and net cash payments of $30 million related to issuance of shares, partially offset by issuances of debt, net of repayments, of $253 million.
As disclosed in Note 13 “Fair Value Measurements and Financial Instruments” of the Notes to Consolidated Financial Statements, the majority of our investments carried at fair value are money market funds. These money market funds are held throughout the world with various financial institutions. We are not aware of any market liquidity issues that would materially impact the fair value of these investments.
As of December 31, 2016, our investments in money market funds had a fair value of $1.4 billion and are reported as Short-term investments or Fiduciary assets in the Consolidated Statements of Financial Position depending on their nature and initial maturity.
In April 2012, our Board of Directors authorized a share repurchase program (the “2012 Share Repurchase Program”) under which up to $5.0 billion of Class A Ordinary Shares may be repurchased. In November 2014, our Board of Directors authorized a share repurchase program (“the 2014 Share Repurchase Program” and together with the 2012 Share Repurchase Program, the “Share Repurchase Programs”) pursuant to which an additional $5.0 billion may be repurchased, in addition to the $5.0 billion of Class A Ordinary Shares authorized under the 2012 Share Repurchase Program. In February 2017, the Board of Directors authorized a $5.0 billion increase to the then existing remaining authorization under its share repurchase program. Under each Share Repurchase Program, shares may be repurchased through the open market or in privately negotiated transactions, based on prevailing market conditions, funded from available capital.
At December 31, 2016, and without giving effect to the increase in February 2017, the remaining authorized amount for share repurchase under the 2014 Share Repurchase Program was $2.8 billion. Under the Repurchase Programs, the Company has repurchased a total of 90.2 million shares for an aggregate cost of $7.2 billion through December 31, 2016.
The major rating agencies’ ratings of our debt at February 23, 2017 appear in the table below.
We do not have exposure related to off balance sheet arrangements. Our cash flows from operations, borrowing availability, and overall liquidity are subject to risks and uncertainties. See Item 1, “Information Concerning Forward-Looking Statements,” and Item 1A, “Risk Factors.”
In 2013, our principal U.K subsidiary agreed with the trustees of one of the U.K. plans to contribute an average of $11 million per year to that pension plan for the next three years. We are currently negotiating the 2016 valuation, which will determine the required cash contributions for the next three years. The trustees of the plan have certain rights to request that our U.K. subsidiary advance an amount equal to an actuarially determined winding-up deficit. As of December 31, 2016, the estimated winding-up deficit was £175 million ($215 million at December 31, 2016 exchange rates). The trustees of the plan have accepted in practice the agreed-upon schedule of contributions detailed above and have not requested the winding-up deficit be paid.
At December 31, 2016, our net assets were $5.5 billion, representing total assets minus total liabilities, a decrease from $6.1 billion as revised for December 31, 2015 (see Note 1 “Basis of Presentation - Revision of Previously Issued Financial Statements” of the Notes to Consolidated Financial Statements for details on the revision of previously issued financial statements). The decrease was due primarily to share repurchases of $1.3 billion, dividends to shareholders of $345 million, and an increase in Accumulated other comprehensive loss of $489 million related primarily to foreign currency translation, partially offset by Net income of $1.4 billion for the year ended December 31, 2016. Working capital increased by $171 million from $480 million at December 31, 2015 to $651 million at December 31, 2016.
Risk Solutions acts as an advisor and insurance and reinsurance broker, helping clients manage their risks, via consultation, as well as negotiation and placement of insurance risk with insurance carriers through our global distribution network.
The demand for property and casualty insurance generally rises as the overall level of economic activity increases and generally falls as such activity decreases, affecting both the commissions and fees generated by our brokerage business. The economic activity that impacts property and casualty insurance is described as exposure units, and is most closely correlated with employment levels, corporate revenue, and asset values. During 2016, pricing was modestly negative on average globally, and we still consider this a “soft market.” In a soft market, premium rates flatten or decrease, along with commission revenues, due to increased competition for market share among insurance carriers or increased underwriting capacity. Changes in premiums have a direct and potentially material impact on the insurance brokerage industry, as commission revenues are generally based on a percentage of the premiums paid by insureds.
Continuing through 2016, we faced difficult conditions as a result of continued weakness in the global economy, and the repricing of credit risk. Weak economic conditions in many markets around the globe have reduced our customers’ demand for our retail brokerage and reinsurance brokerage products, which have had a negative impact on our operational results.
Risk Solutions generated approximately 64% of our consolidated total revenues in 2016. Revenues are generated primarily through fees paid by clients, commissions and fees paid by insurance and reinsurance companies, and investment income on funds held on behalf of clients. Our revenues vary from quarter to quarter throughout the year as a result of the timing of our clients’ policy renewals, the net effect of new and lost business, the timing of services provided to our clients, and the income we earn on investments, which is heavily influenced by short-term interest rates.
Commissions, fees and other revenue for Risk Solutions were as follows (in millions):
Americas Commissions, fees and other revenue increased 2% in 2016 as compared to 2015, reflecting 4% organic revenue growth driven by record new business generation in U.S. Retail and strength in Affinity and Latin America, offset by a 2% impact from unfavorable foreign currency exchange rates.
International Commissions, fees and other revenue was flat in 2016, as 3% organic revenue growth, driven by solid growth across every major region; including Asia, EMEA, and the Pacific, despite economic weakness in certain countries, was offset by a 3% impact from unfavorable foreign currency exchange rates.
Reinsurance Commissions, fees and other revenue was flat in 2016 as compared to 2015, as 1% organic revenue growth was offset by a 1% impact from unfavorable foreign currency exchange rates. Organic revenue growth for 2016 was driven by net new business growth in treaty placements globally and modest growth in facultative placements, partially offset by an unfavorable market impact in treaty and a decline in capital markets transactions and advisory business.
Retirement specializes in global actuarial services, defined contribution consulting, tax and ERISA consulting, and pension administration.
Compensation focuses on compensatory advisory/counsel including: compensation planning design, executive reward strategies, salary survey and benchmarking, market share studies, and sales force effectiveness, with special expertise in the financial services and technology industries.
Investment consulting advises public and private companies, other institutions, and trustees on developing and maintaining investment programs across a broad range of plan types, including defined benefit plans, defined contribution plans, endowments, and foundations.
Benefits Administration applies our human resource expertise primarily through defined benefit (pension), defined contribution (401(k)), and health and welfare administrative services. Our model replaces the resource-intensive processes once required to administer benefit plans with more efficient, effective, and less costly solutions.
Human Resource Business Processing Outsourcing provides market-leading solutions to manage employee data; administers benefits, payroll and other human resources processes; and records and manages talent, workforce and other core human resource process transactions as well as other complementary services such as flexible spending, dependent audit, and participant advocacy.
Commissions, fees and other revenue for HR Solutions decreased $120 million, or 3%, in 2016 compared to 2015 due to a 4% decrease in commissions and fees resulting from net divestitures and a 2% impact from unfavorable foreign currency exchange rates, partially offset by 3% organic revenue growth in commissions and fees.
Consulting services revenue decreased $24 million, or 1% in 2016 as compared to 2015, due primarily to a 3% impact from unfavorable foreign currency exchange rates, partially offset by organic revenue growth of 2% driven by strong growth in retirement solutions, including investment consulting and delegated investment solutions, as well as communications consulting.
Unallocated operating expense includes corporate governance costs not allocated to the operating segments. Net unallocated expenses increased $44 million to $238 million in 2016 compared to $194 million in 2015 due primarily to $50 million of non-cash expenses related to certain pension settlements.
Interest income, Interest expense, and Other income and its components are discussed in Management’s Discussion of Financial Condition and Results of Operations - Review of Consolidated Results.
In accordance with our policies, we regularly evaluate our estimates, assumptions, and judgments, including, but not limited to, those concerning revenue recognition, pensions, goodwill and other intangible assets, contingencies, share-based payments, and income taxes, and base our estimates, assumptions, and judgments on our historical experience and on factors we believe reasonable under the circumstances. The results involve judgments about the carrying values of assets and liabilities not readily apparent from other sources. If our assumptions or conditions change, the actual results we report may differ from these estimates. We believe the following critical accounting policies affect the more significant estimates, assumptions, and judgments we use to prepare these Consolidated Financial Statements.
In connection with our long-term outsourcing service agreements, highly customized implementation efforts are often necessary to set up clients and their human resource or benefit programs on our systems and operating processes. For outsourcing services sold separately or accounted for as a separate unit of accounting, specific, incremental, and direct costs of implementation incurred prior to the services commencing are generally deferred and amortized over the period that the related ongoing services revenue is recognized. Deferred costs are assessed for recoverability on a periodic basis to the extent the deferred cost exceeds related deferred revenue.
applying a single weighted-average discount rate, derived from the yield curve used to measure the benefit obligation at the beginning of the period.
The unrecognized prior service cost (credit) at December 31, 2016 was $6 million, $19 million, and $(6) million in the U.S., U.K. and other plans, respectively.
The U.S. pension plan asset allocation is based on approved allocations following adopted investment guidelines. The investment policy for U.K. and non-U.S. pension plans is generally determined by the plans’ trustees. Because there are several pension plans maintained in the U.K. and non-U.S. category, our target allocation presents a range of the target allocation of each plan. Further, target allocations are subject to change.
Holding all other assumptions constant, the following table reflects what a 25 basis point increase and decrease in our estimated discount rate would have on our projected benefit obligation at December 31, 2016 (in millions):
Goodwill represents the excess of cost over the fair market value of the net assets acquired. We classify our intangible assets acquired as either tradenames, customer related and contract based, or technology and other.
In determining the fair value of our reporting units, we use a discounted cash flow (“DCF”) model based on our most current forecasts. We discount the related cash flow forecasts using the weighted-average cost of capital method at the date of evaluation. Preparation of forecasts and selection of the discount rate for use in the DCF model involve significant judgments, and changes in these estimates could affect the estimated fair value of one or more of our reporting units and could result in a goodwill impairment charge in a future period. We also use market multiples which are obtained from quoted prices of comparable companies to corroborate our DCF model results. The combined estimated fair value of our reporting units from our DCF model often results in a premium over our market capitalization, commonly referred to as a control premium. We believe the implied control premium determined by our impairment analysis is reasonable based upon historic data of premiums paid on actual transactions within our industry. Based on tests performed in both 2016 and 2015, there was no indication of goodwill impairment, and no further testing was required.
The largest performance-based share-based payment award plan is the Leadership Performance Plan (“LPP”), which has a three-year performance period. The 2014 to 2016 performance period ended on December 31, 2016, the 2013 to 2015 performance period ended on December 31, 2015 and the 2012 to 2014 performance period ended on December 31, 2014. The LPP currently has two open performance periods: 2015 to 2017 and 2016 to 2018. A 10% upward adjustment in our estimated performance achievement percentage for both open performance periods would have increased our 2016 expense by approximately $8.1 million, while a 10% downward adjustment would have decreased our expense by approximately $8.1 million. As the percent of expected performance increases or decreases, the potential change in expense can go from 0% to 200% of the targeted total expense.
We assess carryforwards and tax credits for realization as a reduction of future taxable income by using a “more likely than not” determination. We have not recognized a deferred tax liability for permanently reinvested earnings of certain subsidiaries. Additional income taxes could be recorded (or incurred) if we change our investment strategy relating to these subsidiaries, which could materially affect our future effective tax rate.
We have audited the accompanying consolidated statements of financial position of Aon plc as of December 31, 2016 and 2015, and the related consolidated statements of income, comprehensive income, shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2016. These financial statements are the responsibility of Aon plc’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
Based on an analysis of quantitative and qualitative factors in accordance with SEC Staff Accounting Bulletins 99 and 108, the Company concluded that these errors were immaterial, individually and in the aggregate, to the Consolidated Statements of Financial Position, Consolidated Statements of Income, or Consolidated Statements of Cash Flows as presented in the Company’s quarterly and annual financial statements previously filed in the Company’s Quarterly Reports on Form 10-Q and Annual Reports on Form 10-K. While Aon concluded that the errors were immaterial to each of the prior reporting periods affected, the Company further concluded that correcting the errors cumulatively in fiscal year 2016 would materially misstate the Consolidated Statement of Income for the year ended December 31, 2016. As a result, amendment of such reports is not required.
In preparing the Company’s Consolidated Financial Statements for the year ended December 31, 2016, the Company made appropriate revisions to its financial statements for historical periods. Such changes are reflected for the years ended December 31, 2015 and 2014, included in these financial statements, and will also be reflected in the historical periods included in the Company’s subsequent quarterly and annual consolidated financial statements.
The impact to the Consolidated Statements of Financial Position was a decrease of $170 million to Receivables, net, an increase of $66 million to Deferred tax assets, and a decrease of $104 million to Retained earnings in all periods presented. The impact to the full year Consolidated Statements of Income and Consolidated Statements of Comprehensive Income was de minimis in all periods presented. and therefore remains unchanged. There was no impact to the full year cash provided by operating activities in the Consolidated Statements of Cash Flows.
The impact to the Consolidated Statements of Cash Flows previously filed in unaudited Quarterly Reports on Form 10-Q is as follows (in millions):
In prior periods, cash outflows from Restructuring activities were shown as a separate line item within Cash Flows From Operating Activities in the Consolidated Statements of Cash Flows. Beginning in 2016, these amounts are disclosed as a component of the change in Other assets and liabilities within Cash Flows From Operating Activities in the Consolidated Statements of Cash Flows. Cash outflows for Restructuring reserves were $31 million at December 31, 2015 and $83 million at December 31, 2014.
In connection with the Company’s long-term outsourcing service agreements, highly customized implementation efforts are often necessary to set up clients and their human resource or benefit programs on the Company’s systems and operating processes. Qualifying costs of implementation incurred prior to the services commencing are generally deferred and amortized over the period that the related ongoing services revenue is recognized. Deferred costs are assessed for recoverability on a periodic basis to the extent the deferred cost exceeds related deferred revenue.
The Company records net period cost relating to its pension and other post-retirement benefit plans based on calculations that include various actuarial assumptions, including discount rates, assumed rates of return on plan assets, inflation rates, mortality rates, compensation increases, and turnover rates. The Company reviews its actuarial assumptions on an annual basis and modifies these assumptions based on current rates and trends. The effects of gains, losses, and prior service costs and credits are amortized over future service periods or future estimated lives if the plans are frozen. The funded status of each plan, calculated as the fair
Cash and cash equivalents include cash balances and all highly liquid investments with initial maturities of three months or less. Short-term investments consist of money market funds. The estimated fair value of cash and cash equivalents and short-term investments approximates their carrying values.
At December 31, 2016, Cash and cash equivalents and Short-term investments totaled $721 million compared to $740 million at December 31, 2015. Of the total balance, $82 million and $105 million was restricted as to its use at December 31, 2016 and 2015, respectively. Included within the December 31, 2016 and 2015 balances, respectively, were £43.3 million ($53.2 million at December 31, 2016 exchanges rates) and £43.3 million ($64.6 million at December 31, 2015 exchange rates) of operating funds required to be held by the Company in the U.K. by the Financial Conduct Authority, a U.K.-based regulator, which were included in Short-term investments. In addition, Cash and cash equivalents included restricted balances of $29 million and $40 million at December 31, 2016 and 2015, respectively.
Goodwill represents the excess of acquisition cost over the fair value of the net assets in the acquisition of a business. Goodwill is allocated to various reporting units, which are one reporting level below the operating segment. Upon disposition of a business entity, goodwill is allocated to the disposed entity based on the fair value of that entity compared to the fair value of the reporting unit in which it was included. Goodwill is not amortized, but instead is tested for impairment at least annually. The goodwill impairment test is performed at the reporting unit level. The Company initially performs a qualitative analysis to determine if it is more likely than not that the goodwill balance is impaired. If such a determination is made, then the Company will perform a two-step quantitative analysis. First, the fair value of each reporting unit is compared to its carrying value. If the fair value of the reporting unit is less than its carrying value, the Company performs a hypothetical purchase price allocation based on the reporting unit’s fair value to determine the fair value of the reporting unit’s goodwill. Any resulting difference will be a charge to Other general expenses in the Consolidated Statements of Income in the period in which the determination is made. Fair value is determined using a combination of present value techniques and market prices of comparable businesses.
The Company discontinues hedge accounting prospectively when (1) the derivative expires or is sold, terminated, or exercised, (2) the qualifying criteria are no longer met, or (3) management removes the designation of the hedging relationship.
Deferred income taxes are recognized for the effect of temporary differences between financial reporting and tax basis of assets and liabilities and are measured using the enacted marginal tax rates and laws that are currently in effect. The effect on deferred tax assets and liabilities from a change in tax rates is recognized in the period when the rate change is enacted.
In March 2016, the FASB issued new accounting guidance on several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The new guidance requires all excess tax benefits and tax deficiencies to be recognized as income tax expense or benefit in the income statement and treated as discrete items in the reporting period. Further, excess tax benefits are required to be classified along with other income tax cash flows as an operating activity. Amendments related to the timing of when excess tax benefits are recognized, minimum statutory withholding requirements, forfeitures, and intrinsic value should be applied using a modified retrospective transition method by means of a cumulative-effect adjustment to equity as of the beginning of the period in which the guidance is adopted. Amendments related to the presentation of employee taxes paid on the statement of cash flows when an employer withholds shares to meet the minimum statutory withholding requirement should be applied retrospectively. Amendments requiring recognition of excess tax benefits and tax deficiencies in the income statement and the practical expedient for estimating expected term should be applied prospectively. An entity may elect to apply the amendments related to the presentation of excess tax benefits on the statement of cash flows using either a prospective transition method or a retrospective transition method. The guidance is effective for Aon in the first quarter of 2017 and early adoption is permitted.
Upon the adoption of this guidance on January 1, 2017, the Company expects to recognize an increase to Deferred tax assets of approximately $49 million through a cumulative-effect adjustment to Retained earnings for excess tax benefits not previously recognized. On a prospective basis, excess tax benefits will be recognized in the Consolidated Statements of Income each quarter as share-based payment awards vest, which could have a significant impact on Income tax expense in the Consolidated Statement of Income and Additional paid-in capital in the Consolidated Statements of Financial Position. The impact will be driven, in part, by the difference between the Company’s share price at the time share-based payment transactions vest or options are exercised in the future periods and the fair value of the awards at the date of grant. Amendments related to the presentation of excess tax benefits on the Consolidated Statement of Cash Flows, which will be applied prospectively, may have a significant impact on Cash Flows from Operating Activities and Cash Flows from Financing Activities in the Consolidated Statements of Cash Flows. The impact will also be driven by the Company’s share price at the time share-based payment transactions vest in future periods. The Company does not expect other elements of the guidance to have a material impact on its Consolidated Financial Statements.
In February 2016, the FASB issued new accounting guidance on leases, which requires lessees to recognize assets and liabilities for most leases. Under the new guidance, a lessee should recognize in the Consolidated Statement of Financial Position a liability to make lease payments and a right-of-use asset representing its right to use the underlying asset for the lease term. The recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee have not significantly changed from currently effective U.S. GAAP. The new standard will be effective for the Company in the first quarter of 2019, with early application permitted. In transition, lessees and lessors are required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach. The modified retrospective approach includes a number of optional practical expedients that entities may elect to apply. These practical expedients relate to the identification and classification of leases that commenced before the effective date, initial direct costs for leases that commenced before the effective date, and the
ability to use hindsight in evaluating lessee options to extend or terminate a lease or to purchase the underlying asset. Aon is currently evaluating the impact the standard will have on its Consolidated Financial Statements, as well as the method of transition and period of adoption.
In January 2016, the FASB issued new accounting guidance on recognition and measurement of financial assets and financial liabilities. The amendments in the new guidance make targeted improvements, which include the requirement to measure equity investments with readily determinable fair values at fair value through net income, simplification of the impairment assessment for equity investments without readily determinable fair values, adjustments to existing and additional disclosure requirements, and additional tax considerations. An entity should apply the amendments by means of a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption. The amendments related to equity securities without readily determinable fair values (including disclosure requirements) should be applied prospectively to equity investments that exist as of the date of adoption of the guidance. The guidance is effective for the Company in the first quarter of 2018 and early adoption is permitted. Aon is currently evaluating the impact that the standard will have on the its Consolidated Financial Statements, as well as the method of transition and period of adoption.
In November 2015, the FASB issued new accounting guidance on the balance sheet presentation of deferred taxes, which requires that deferred tax liabilities and assets be classified as non-current. Aon early adopted this guidance in the second quarter of 2016 and retrospectively applied its requirements to all periods presented. For the year ended December 31, 2015, Aon reclassified its current deferred tax positions to non-current and netted the new balances by jurisdiction, which increased Deferred tax assets by $93 million and decreased Deferred tax liabilities by $139 million on the Consolidated Statement of Financial Position.
A preliminary assessment to determine the impacts of the new accounting standard has been performed. The Company is currently implementing accounting and operational processes which will be impacted by the new standard, but is unable to provide information on quantitative impacts at this time.
Additionally, the new standard provides guidance on accounting for certain revenue-related costs including when to capitalize costs associated with obtaining and fulfilling a contract. These costs are currently expensed as incurred under existing U.S. GAAP. These assets recognized for the costs to obtain and/or fulfill a contract will be amortized on a on a systematic basis that is consistent with the transfer of the services to which the asset relates. The Company is quantifying the nature and amount of costs that would qualify for capitalization and the amount of amortization that will be recognized in each period.
Depreciation expense, which includes software amortization, was $232 million, $229 million, and $242 million for the years ended December 31, 2016, 2015, and 2014, respectively.
The components of Other current liabilities are as follows (in millions):
The components of Other non-current liabilities are as follows (in millions):
The number of acquisitions completed within each reportable segment is as follows:
On January 1, 2016, the Company completed the transaction to acquire Globe Events Management, an insurance, retirement, and investment consulting business company based in Australia.
Intangible assets are primarily customer-related and contract-based assets; those acquired as part of a business acquisition in 2016 had a weighted average useful economic life of 13 years. Acquisition related costs incurred and recognized within Other general expenses for the year ended December 31, 2016 were $8 million. Total revenue for these acquisitions included in the Company’s Consolidated Statement of Income for the year ended December 31, 2016 was $68 million.
The results of operations of these acquisitions are included in the Consolidated Financial Statements as of the acquisition date. The results of operations of the Company would not have been materially different if these acquisitions had been reported from the beginning of the period in which they were acquired.
The number of dispositions completed within each reportable segment is as follows:
Total pretax gains, net of losses, recognized were $39 million, $82 million, and $24 million, respectively, for the years ended December 31, 2016, 2015, and 2014. Gains and losses recognized as a result of a disposition are included in Other income in the Consolidated Statements of Income.
(1) Amended to reflect the adoption of new guidance related to the presentation of debt issuance costs as described in Note 2 “Summary of Significant Accounting Principles and Practices.”
On September 30, 2015, $600 million of 3.50% Senior Notes issued by Aon Corporation matured and were repaid in full.
As of December 31, 2016, Aon plc had two primary committed credit facilities outstanding: its $400 million U.S. credit facility expiring in March 2017 (the “2017 Facility”) and its $900 million multi-currency U.S. credit facility expiring in February 2021 (the “2021 Facility”). The Company plans to let the 2017 facility expire but may evaluate obtaining additional committed credit in the future. Each of these facilities includes customary representations, warranties and covenants, including financial covenants that require Aon plc to maintain specified ratios of adjusted consolidated EBITDA to consolidated interest expense and consolidated debt to adjusted consolidated EBITDA, in each case, tested quarterly. At December 31, 2016, Aon plc did not have borrowings under either the 2017 Facility or the 2021 Facility, and was in compliance with all covenants contained therein during the twelve months ended December 31, 2016.
Income before income tax and the provision for income tax consist of the following (in millions):
Income before income taxes shown above is based on the location of the business unit to which such earnings are attributable for tax purposes. In addition, because the earnings shown above may in some cases be subject to taxation in more than one country, the income tax provision shown above as U.K., U.S. or Other may not correspond to the geographic attribution of the earnings.
The Company performs a reconciliation of the income tax provisions based on its domicile and statutory rate at each reporting period. The 2016, 2015, and 2014 reconciliations are based on the U.K. statutory corporate tax rate of 20.0%, 20.3%, and 21.5%, respectively. The reconciliation to the provisions reflected in the Consolidated Financial Statements is as follows:
The Company recognized, as an adjustment to additional paid-in-capital, income tax benefits attributable to employee stock compensation of $(4) million, $126 million and $89 million in 2016, 2015, and 2014, respectively. The year-over-year change is primarily attributable to excess tax benefits not recorded in 2016 because the deduction did not decrease income taxes payable.
Deferred income taxes of $11 million were accrued in 2016 on undistributed earnings that are not permanently reinvested. Undistributed earnings of non-U.S. entities were approximately $2.3 billion at December 31, 2016. U.S. income taxes have not been provided on these undistributed earnings because they are considered to be permanently reinvested in those subsidiaries. It is not practicable to estimate the amount of unrecognized deferred tax liabilities, if any, for these undistributed foreign earnings.
As of December 31, 2016, the Company had $126 million of federal operating loss carryforwards and $110 million of state operating loss carryforwards for which a benefit will be recorded in APIC when realized.
During 2012, the Company was granted a tax holiday for the period from October 1, 2012 through September 30, 2022, with respect to withholding taxes and certain income derived from services in Singapore. This tax holiday and reduced withholding tax rate may be extended when certain conditions are met or may be terminated early if certain conditions are not met. The benefit realized was approximately $46 million, $23 million, and $7 million during the years ended December 31, 2016, 2015, and 2014, respectively. The impact of this tax holiday on diluted earnings per share was $0.17, $0.08, and $0.02 during the years ended December 31, 2016, 2015, and 2014, respectively.
The following is a reconciliation of the Company’s beginning and ending amount of uncertain tax positions (in millions):
The Company’s liability for uncertain tax positions as of December 31, 2016, 2015, and 2014, includes $240 million, $200 million, and $174 million, respectively, related to amounts that would impact the effective tax rate if recognized. It is possible that the amount of unrecognized tax benefits may change in the next twelve months; however, the Company does not expect the change to have a significant impact on its consolidated statements of income or consolidated balance sheets. These changes may be the result of settlements of ongoing audits. At this time, an estimate of the range of the reasonably possible outcomes within the twelve months cannot be made.
The Company and its subsidiaries file income tax returns in their respective jurisdictions. The Company has substantially concluded all U.S. federal income tax matters for years through 2007. Material U.S. state and local income tax jurisdiction examinations have been concluded for years through 2005. The Company has concluded income tax examinations in its primary non-U.S. jurisdictions through 2005.
As a U.K. incorporated company, the Company is required under U.K. law to have available “distributable reserves” to make share repurchases or pay dividends to shareholders. Distributable reserves may be created through the earnings of the U.K. parent company and, amongst other methods, through a reduction in share capital approved by the English Companies Court. Distributable reserves are not linked to a U.S. GAAP reported amount (e.g., retained earnings). As of December 31, 2016 and 2015, the Company had distributable reserves in excess of $1.6 billion and $2.1 billion, respectively.
In April 2012, the Company’s Board of Directors authorized a share repurchase program under which up to $5.0 billion of Class A Ordinary Shares may be repurchased (“2012 Share Repurchase Program”). In November 2014, the Company’s Board of Directors authorized a new $5.0 billion share repurchase program in addition to the existing program (“2014 Share Repurchase Program” and, together with the 2012 Share Repurchase Program, the “Repurchase Programs”). Subsequent to the close of the fourth quarter 2016, the Board of Directors authorized a $5.0 billion increase to the existing remaining authorization under its share repurchase program. Under each program, shares may be repurchased through the open market or in privately negotiated transactions, from time to time, based on prevailing market conditions, and will be funded from available capital.
During 2016, the Company repurchased 12.2 million shares at an average price per share of $102.66 for a total cost of $1.3 billion under the 2014 Share Repurchase Program. The Company recorded an additional $6 million of transaction costs associated with the repurchase to retained earnings during 2016. During 2015, the Company repurchased 16.0 million shares at an average price per share of $97.04 for a total cost of $1.6 billion under the Repurchase Programs. In August 2015, the $5 billion of Class A Ordinary Shares authorized under the 2012 Share Repurchase Program was exhausted. At December 31, 2016, the remaining authorized amount for share repurchase under the 2014 Share Repurchase Program is $2.8 billion. Under the Repurchase Programs, the Company has repurchased a total of 90.2 million shares for an aggregate cost of $7.2 billion.
Potentially issuable shares are not included in the computation of diluted net income per share if their inclusion would be antidilutive. There were no shares excluded from the calculation for in 2016, 2015, or 2014.
During 2016, 2015, and 2014, the Company paid dividends on its Class A Ordinary Shares of $345.0 million, $323.0 million, and $273.0 million, respectively. Dividends paid per Class A Ordinary Share were $1.29, $1.15 and $0.92 for the years ended December 31, 2016, 2015, and 2014 respectively.
Reclassifications from this category included in Accumulated other comprehensive loss are recorded in Compensation and benefits
Aon maintains defined contribution savings plans for the benefit of its U.S., U.K., Netherlands and Canada employees. The expense recognized for these plans is included in Compensation and benefits in the Consolidated Statements of Income, as follows (in millions):
The Company sponsors defined benefit pension and post-retirement health and welfare plans that provide retirement, medical, and life insurance benefits. The post-retirement healthcare plans are contributory, with retiree contributions adjusted annually, and the life insurance and pension plans are generally noncontributory. The significant U.S., U.K., Netherlands and Canadian pension plans are closed to new entrants.
Amounts recognized in Accumulated other comprehensive loss (income) that have not yet been recognized as components of net periodic benefit cost at December 31, 2016 and 2015 consist of (in millions):
In 2016, U.S. plans with a projected benefit obligation (“PBO”) and an accumulated benefit obligation (“ABO”) in excess of the fair value of plan assets had a PBO of $2.9 billion, an ABO of $2.9 billion, and plan assets with a fair value of $1.7 billion. U.K. plans with a PBO in excess of the fair value of plan assets had a PBO of $1.2 billion and plan assets with a fair value of $1.1 billion, and plans with an ABO in excess of the fair value of plan assets had an ABO of $1.2 billion and plan assets with a fair value of $1.1 billion. Other plans with a PBO in excess of the fair value of plan assets had a PBO of $1.2 billion and plan assets with a fair value of $1.0 billion, and plans with an ABO in excess of the fair value of plan assets had an ABO of $1.1 billion and plan assets with a fair value of $1.0 billion.
In 2015, U.S. plans with a PBO and an ABO in excess of the fair value of plan assets had a PBO of $3.2 billion, an ABO of $3.2 billion, and plan assets of $2.0 billion. U.K. plans with a PBO in excess of the fair value of plan assets had a PBO of $1.2 billion and plan assets with a fair value of $1.1 billion, and plans with an ABO in excess of the fair value of plan assets had an ABO of $1.2 billion and plan assets with a fair value of $1.1 billion. Other plans with a PBO in excess of the fair value of plan assets had a PBO of $1.2 billion and plan assets with a fair value of $1.0 billion, and plans with an ABO in excess of the fair value of plan assets had an ABO of $1.1 billion and plan assets with a fair value of $1.0 billion.
In March 2016, the Company announced a plan to offer a voluntary one-time lump sum payment option to certain eligible former employees under one of the Company’s U.K. pension plans, that if accepted, would settle the Company’s pension obligations to them. The lump sum cash payment offer closed during the second quarter of 2016. In total, lump sum payments from plan assets of £116 million ($159 million using June 30, 2016 exchange rates) were paid. As a result of this settlement, the Company remeasured the assets and liabilities of the U.K. pension plan during the second quarter of 2016, which in aggregate resulted in a reduction to the projected benefit obligation of £103 million ($141 million using June 30, 2016 Exchange rates) as well as a non-cash settlement charge of £42 million ($61 million using average June 2016 exchange rate) in the second quarter of 2016.
To determine the expected long-term rate of return on plan assets, the historical performance, investment community forecasts and current market conditions are analyzed to develop expected returns for each asset class used by the plans. The expected returns for each asset class are weighted by the target allocations of the plans. The expected return on plan assets in the U.S. of 7.81% reflects a portfolio that is seeking asset growth through a higher equity allocation while maintaining prudent risk levels. The portfolio contains certain assets that have historically resulted in higher returns and other financial instruments to minimize downside risk.
The Company determined the fair value of plan assets through numerous procedures based on the asset class and available information. Refer to Note 13 “Fair Value Measurements and Financial Instruments” for a description of the procedures performed to determine the fair value of the plan assets.
Consists of corporate and government bonds, asset-backed securities, and fixed income derivatives.
The fair values of the Company’s other major pension plan assets at December 31, 2016 and December 31, 2015, by asset category, are as follows (in millions):
The U.S. investment policy, as established by the Aon Retirement Plan Governance and Investment Committee (“RPGIC”), seeks reasonable asset growth at prudent risk levels within target allocations, which are 41% equity investments, 30% fixed income investments, and 29% other investments. Aon believes that plan assets are well-diversified and are of appropriate quality. The investment portfolio asset allocation is reviewed quarterly and re-balanced to be within policy target allocations. The investment policy is reviewed at least annually and revised, as deemed appropriate by the RPGIC. The investment policies for international plans are generally established by the local pension plan trustees and seek to maintain the plans’ ability to meet liabilities and to comply with local minimum funding requirements. Plan assets are invested in diversified portfolios that provide adequate levels of return at an acceptable level of risk. The investment policies are reviewed at least annually and revised, as deemed appropriate to ensure that the objectives are being met. At December 31, 2016, the weighted average targeted allocation for the U.K. and non-U.S. plans was 14% for equity investments, 77% for fixed income investments, and 9% for other investments.
Based on current assumptions, in 2017, the Company expects to contribute approximately $80 million, $87 million, and $18 million to its U.K., U.S. and other significant international pension plans, respectively.
Estimated future benefit payments for plans are as follows at December 31, 2016 (in millions):
Other information related to the Company’s other post-retirement benefit plans are as follows:
The fair value of RSUs that vested during 2016, 2015 and 2014 was $200 million, $196 million and $183 million, respectively.
Unamortized deferred compensation expense amounted to $382 million as of December 31, 2016, with a remaining weighted-average amortization period of approximately 2.1 years.
The vesting of PSAs is contingent upon meeting a cumulative level of earnings per share performance over a three-year period. The actual issue of shares may range from 0-200% of the target number of PSAs granted, based on the terms of the plan and level of achievement of the related performance target. The grant date fair value of PSAs is based upon the market price of an Aon ordinary share at the date of grant. The performance conditions are not considered in the determination of the grant date fair value for these awards. Compensation expense is recognized over the performance period based on management’s estimate of the number of units expected to vest. Management evaluates its estimate of the actual number of shares expected to be issued at the end of the programs on a quarterly basis. The cumulative effect of the change in estimate is recognized in the period of change as an adjustment to Compensation and benefits expense, if necessary. Dividend equivalents are not paid on PSAs.
During 2016, the Company issued approximately 1.3 million shares in connection with performance achievements related to the 2013-2015 Leadership Performance Plan (“LPP”) cycle. During 2015, the Company issued approximately 1.6 million shares in connection with performance achievements related to the 2012-2014 LPP cycle. During 2014, the Company issued approximately 0.8 million shares in connection with performance achievements related to the 2011-2013 LPP cycle and 0.2 million shares related to other performance plans.
The Company also uses foreign exchange derivatives, typically forward contracts and options to economically hedge the currency exposure of the Company’s global liquidity profile, including monetary assets or liabilities that are denominated in a non-functional currency of an entity, typically on a rolling 30-day basis, but may be for up to one year in the future. These derivatives are not accounted for as hedges, and changes in fair value are recorded each period in Other income in the Consolidated Statements of Income.
Included within Other current assets ($6 million in 2016 and $15 million in 2015, respectively) or Other non-current assets ($9 million in 2016 and $17 million in 2015, respectively)
The Company did not reclassify any deferred gains or losses related to net investment hedges from Accumulated other comprehensive income (loss) to earnings during the twelve months ended December 31, 2016. In addition, the Company did not incur any ineffectiveness related to net investment hedges during the twelve months ended December 31, 2016.
The following methods and assumptions are used to estimate the fair values of the Company’s financial instruments, including pension assets (refer to Note 10 “Employee Benefits”):
Equity investments consist of domestic and international equity securities and equity derivatives valued using the closing stock price on a national securities exchange. Over the counter equity derivatives are valued using observable inputs such as underlying prices of the underlying security and volatility. On a sample basis the Company reviews the listing of Level 1 equity securities in the portfolio and agrees the closing stock prices to a national securities exchange, and independently verifies the observable inputs for Level 2 equity derivatives and securities.
A retail insurance brokerage subsidiary of Aon was sued on September 14, 2010 in the Chancery Court for Davidson County, Tennessee Twentieth Judicial District, at Nashville by a client, Opry Mills Mall Limited Partnership (“Opry Mills”) that sustained flood damage to its property in May 2010. The lawsuit seeks $200 million in coverage from numerous insurers with whom this Aon subsidiary placed the client’s property insurance coverage. The insurers contend that only $50 million in coverage (which has already been paid) is available for the loss because the flood event occurred on property in a high hazard flood zone. Opry Mills is seeking full coverage from the insurers for the loss and has sued this Aon subsidiary in the alternative for the same $150 million difference on various theories of professional liability if the court determines there is not full coverage. In addition, Opry Mills seeks prejudgment interest, attorneys’ fees and enhanced damages which could substantially increase Aon’s exposure. In March 2015, the trial court granted partial summary judgment in favor of plaintiffs and against the insurers, holding generally that the plaintiffs are entitled to $200 million in coverage under the language of the policies. In August 2015, a jury returned a verdict in favor of Opry Mills and against the insurers in the amount of $204 million. The insurers have appealed both of these trial court decisions. Aon believes it has meritorious defenses and intends to vigorously defend itself against these claims.
On June 29, 2015, Lyttelton Port Company Limited (“LPC”) sued Aon New Zealand in the Christchurch Registry of the High Court of New Zealand. LPC alleges, among other things, that Aon was negligent and in breach of contract in arranging LPC’s property insurance program for the period covering June 30, 2010, to June 30, 2011. LPC contends that acts and omissions by Aon caused LPC to recover less than it otherwise would have from insurers for losses suffered in the 2010/2011 Canterbury Earthquakes. LPC claims damages of approximately NZD $184 million ($127 million at December 31, 2016 exchange rates) plus interest and costs. Aon believes that it has meritorious defenses and intends to vigorously defend itself against these claims.
A pensions consulting and administration subsidiary of Hewitt before its acquisition by Aon provided advisory services to the trustees of the Philips UK pension fund and the relevant employer of fund beneficiaries. On January 2, 2014, Philips Pension Trustees Limited and Philips Electronics UK Limited (together, “Philips”) sued Aon in the High Court, Chancery Division, London alleging negligence and breach of duty. The proceedings assert Philips’ right to claim damages related to Philips’ use of a credit default swap hedging strategy pursuant to the supply of the advisory services, which is said to have resulted in substantial damages to Philips. Philips sought approximately £189 million ($232 million at December 31, 2016 exchange rates), plus interest and costs. In June 2015, the High Court ordered Philips to clarify several aspects of its claim. In its clarification, Philips increased the amount of its claim to £290 million ($356 million at December 31, 2016 exchange rates), plus interest and costs. In October 2016, all parties reached an agreement to settle this case, and the settlement is now concluded. The terms of this settlement did not have a material impact on Aon’s results of operations or financial condition.
The Company has certain contractual contingent guarantees for premium payments owed by clients to certain insurance companies. The maximum exposure with respect to such contractual contingent guarantees was approximately $95 million at December 31, 2016 compared to $104 million at December 31, 2015.
The Company has two reportable segments: Risk Solutions and HR Solutions. Unallocated income and expenses, when combined with the reportable segments and after the elimination of intersegment revenues and expenses, equal the amounts in the Consolidated Financial Statements. The accounting policies of the reportable segments are the same as those described in Note 2 “Summary of Significant Accounting Principles and Practices.”
HR Solutions partners with organizations to solve their most complex benefits, talent and related financial challenges, and improve business performance by designing, implementing, communicating, and administering a wide range of human capital, retirement, investment management, health care, compensation, and talent management strategies.
A reconciliation of segment operating income before tax to income before income taxes is as follows (in millions):
Consolidated Revenue by geographic area, which is attributed on the basis of where the services are performed, is as follows (in millions):
As described in Note 14 “Commitments and Contingencies,” in connection with the Redomestication, Aon plc entered into various agreements pursuant to which it agreed to guarantee the obligations of Aon Corporation arising under issued and outstanding debt securities, including the 5.00% Notes due September 2020, the 8.205% Notes due January 2027 and the 6.25% Notes due September 2040 (collectively, the “Aon Corp Notes”). Aon Corporation is a 100% indirectly owned subsidiary of Aon plc. All guarantees of Aon plc are full and unconditional. There are no other subsidiaries of Aon plc that are guarantors of the Aon Corp Notes.
The following tables set forth Condensed Consolidating Statements of Income and Condensed Consolidating Statements of Comprehensive Income for the years ended December 31, 2016, 2015, and 2014, Condensed Consolidating Statements of Financial Position as of December 31, 2016 and December 31, 2015, and Condensed Consolidating Statements of Cash Flows for the years ended December 31, 2016, 2015, and 2014, in accordance with Rule 3-10 of Regulation S-X. The condensed consolidating financial information includes the accounts of Aon plc, the accounts of Aon Corporation, and the combined accounts of the non-guarantor subsidiaries. The condensed consolidating financial statements are presented in all periods as a merger under common control. The principal consolidating adjustments are to eliminate the investment in subsidiaries and intercompany balances and transactions.
In January 2015, Aon plc transferred its ownership of all of its directly held subsidiaries to Aon Global Holdings Limited, an intermediate holding company. The financial results of Aon Global Holdings Limited are included in the Other Non-Guarantor Subsidiaries column of the Condensed Consolidating Financial Statements. The Company has reflected the transfer of Aon Corporation from Aon plc to Aon Global Holdings Limited below for all periods presented.
As discussed in Note 1 “Basis of Presentation,” the Company has identified certain accounting errors that affected consolidated financial amounts that were previously presented in its earlier Forms 10-Q and 10-K for the periods below. Selected quarterly financial data for the years ended December 31, 2016 and 2015 as reported, the effect of the change, and selected quarterly financial data for the years ended December 31, 2016 and 2015 as revised, are as follows (in millions, except per share data):
18. Subsequent Event - Disposition of Benefits Administration and Business Process Outsourcing
The Purchase Agreement provides that the Buyer will be required to pay to Aon a $215 million termination fee, together with the reimbursement of certain expenses, if the Purchase Agreement is terminated under certain circumstances. Both Aon and the Buyer have the right to terminate the Purchase Agreement if the closing has not occurred on or before August 9, 2017. An affiliate of the Sponsor has guaranteed the payment of the termination fee to the Company, if and when due, under the Purchase Agreement, together with certain other reimbursement obligations of the Buyer under the Purchase Agreement.
In connection with the Transaction, the Company expects to implement a cost reduction program.