NEW ACCOUNTING STANDARDS:

ASU 2014-09

In May 2014, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, “Revenue from Contracts with Customers (Topic 606)” (“ASC 606”), which outlines a new, single comprehensive model for entities to use in accounting for revenue arising from contracts with customers.

Effective October 1, 2018, the Company adopted ASC 606, on a modified retrospective basis, to all contracts at the date of initial adoption. The Company recognized the cumulative-effect of initially adopting ASC 606 as an adjustment to retained earnings as of October 1, 2018, with a corresponding increase to other current liabilities. Comparative information for the three months ended December 31, 2017 has not been restated and continues to be reported under accounting standards in effect for that period. The adoption of ASC 606 did not have a material effect on the Company’s net income for the three months ended December 31, 2018. The Company does not expect the adoption of ASC 606 to have a material effect on its net income on a continuing basis.

The cumulative-effect of adopting ASC 606 was as follows (in thousands):



	September 30, 2018		ASC 606 Adjustment			October 1, 2018
Other current liabilities	$	123,303	$	41,575		$	164,878
Retained earnings	$	250,707	$	(41,575	)	$	209,132

The impact of adopting ASC 606 on the Company’s condensed consolidated balance sheet as of December 31, 2018 was as follows (in thousands):



	Balance under ASC 606		Balance without ASC 606		Effect of Change
	December 31, 2018		December 31, 2018		Higher/ (Lower)
Other current liabilities	$	176,033	$	135,774	$	40,259
Retained earnings	$	203,255	$	243,514	$	(40,259	)

The impact of adopting ASC 606 on the Company’s condensed consolidated statement of income for three months ended December 31, 2018 was as follows (in thousands):



									Promotional
						Promotional			Allowances			Gross vs.
	For the					Allowances			(Non-			Net									Effect of
	Three Months Ended		Loyalty			(Discretionary			Discretionary			Presentation			Cash			Balance			Change
	December 31, 2018		Points			Complimentaries)			Complimentaries)			and Other			Giveaways			without			Higher/
	2018		(1)			(2)			(2)			(3)			(4)			ASC 606			(Lower)
Revenues:
Gaming	$	221,935	$	1,219		$	(30,736	)	$	(17,847	)	$	5,650		$	(2,679	)	$	266,328		$	(44,393	)
Food and beverage	34,806		—			10,101			—			1,149			—			23,556			11,250
Hotel	22,977		—			5,998			—			164			—			16,815			6,162
Retail, entertainment and other	39,782		—			152			1,605			(1,962		)	—			39,987			(205		)
Gross revenues	319,500		1,219			(14,485		)	(16,242		)	5,001			(2,679		)	346,686			(27,186		)
Less-Promotional allowances	—		—			15,650			6,381			706			—			(22,737		)	22,737
Net revenues	319,500		1,219			1,165			(9,861		)	5,707			(2,679		)	323,949			(4,449		)
Operating costs and expenses:
Gaming	128,664		(95		)	(1,711		)	(29,629		)	5,752			(2,679		)	157,026			(28,362		)
Food and beverage	26,447		—			2,876			7,355			1,149			—			15,067			11,380
Hotel	9,803		—			—			2,591			164			—			7,048			2,755
Retail, entertainment and other	20,762		—			—			9,822			(1,467		)	—			12,407			8,355
Advertising, general and administrative	49,018		—			—			—			109			—			48,909			109
Corporate	12,425		—			—			—			—			—			12,425			—
Depreciation and amortization	27,090		—			—			—			—			—			27,090			—
Other, net	1,921		—			—			—			—			—			1,921			—
Total operating costs and expenses	276,130		(95		)	1,165			(9,861		)	5,707			(2,679		)	281,893			(5,763		)
Income from operations	$	43,370	$	1,314		$	—		$	—		$	—		$	—		$	42,056		$	1,314

The most significant impacts were as follows:

(1) ASC 606 modified the accounting related to loyalty points. The Company’s loyalty reward programs allow patrons to utilize their reward membership cards to earn loyalty points that are redeemable for complimentary items such as food and beverage, lodging and retail products. Under ASC 606, the Company is required to utilize a deferred revenue model to reduce gaming revenues by the estimated fair value of loyalty points earned by patrons and recognize the related revenues when such loyalty points are redeemed. The deferred revenue liability is based on the estimated stand-alone selling price (“SSP”) of the loyalty points earned after factoring in the likelihood of redemption ("Breakage"). Prior to the adoption of ASC 606, the liability for unredeemed loyalty points was estimated based on expected redemption rates and estimated costs of the goods and services to be provided.

(2) ASC 606 modified the accounting related to promotional allowances. The Company no longer recognizes revenues for complimentary items provided to patrons, as well as for goods and services provided to patrons in connection with loyalty point redemptions, as gross revenues with a corresponding offset to promotional allowances to arrive at net revenues. The majority of such amounts previously included within promotional allowances now offset gaming revenues based on an allocation of revenues to performance obligations utilizing SSP. These changes resulted in the elimination of promotional allowances and the reclassification of revenues between the various revenue line items.

(3) ASC 606 modified gross versus net presentation. The Company now records mandatory service charges on food and beverage items and wide area progressive operator fees on a gross basis, with amounts received from patrons recorded as revenues and the corresponding amounts paid recorded as expenses. This change resulted in an increase in revenues with a corresponding increase in expenses.

(4) ASC 606 modified the accounting related to cash giveaways. The Company now records cash giveaways as a reduction to gaming revenues. Previously, the Company recorded cash giveaways as a reduction to expenses. This change resulted in a decrease in expenses with a corresponding decrease in gaming revenues.

The Company’s revenues from contracts with customers consist of gaming, food and beverage, hotel, retail, entertainment and convention related transactions, as well as management and development services related to management and development contracts with third-party facilities.

The transaction price in a gaming contract is the difference between gaming wins and losses, not the total amount wagered. The transaction prices in food and beverage, hotel, retail, entertainment and convention contracts are the net amounts collected for such goods and services. Sales and other taxes collected on behalf of governmental authorities are accounted for on a net basis and are not included in revenues or expenses. The transaction price in a racing contract, inclusive of live racing at the Company’s facilities and import and export arrangements, is the commission received from the pari-mutuel pool less contractual fees and obligations, which primarily consist of purse funding requirements, simulcasting fees, tote fees and certain pari-mutuel taxes that are directly related to racing operations. The transaction prices in management and development service contracts are the amounts collected for services rendered in accordance with contractual terms, inclusive of reimbursable costs and expenses.

Gaming transactions involve two performance obligations for patrons participating in the Company’s loyalty reward programs and a single performance obligation for patrons that do not participate. The Company applies a practical expedient by accounting for gaming contracts on a portfolio basis, as such contracts share similar characteristics. The Company does not expect the effects on its condensed consolidated financial statements under this approach to differ materially versus under an individual contract basis. Revenues allocated to gaming performance obligations are recognized when gaming occurs as such activities are settled immediately. Revenues allocated to the loyalty points deferred revenue liability are recognized as revenues when loyalty points are redeemed. The deferred revenue liability is based on the estimated SSP of the loyalty points earned after factoring in Breakage.

Food and beverage, hotel, retail, entertainment and convention transactions have been determined to be separate, stand-alone performance obligations and the transaction prices for such contracts are recorded as revenues as the related goods and services are transferred to patrons. Revenues from contracts which include a combination of these transactions are allocated on a pro rata basis based on the goods' and services' SSP.

Management and development services have been determined to be separate, stand-alone performance obligations and the transaction prices for such contracts are recorded as revenues as the related services are performed.

Revenue Disaggregation

The Company is a geographically diversified, multi-jurisdictional owner, operator and manager of gaming facilities. The Company’s current operations are focused within Connecticut and Pennsylvania. The Company also currently manages other gaming facilities within the United States. The Company generates revenues by providing the following types of goods and services: (1) gaming, (2) food and beverage, (3) hotel, (4) retail, entertainment, and other and (5) management and development. Revenue disaggregation by the various types of revenues and geographic locations for the three months ended December 31, 2018 was as follows (in thousands):




	Connecticut		Pennsylvania		Other
	(Mohegan Sun)		(Mohegan Sun Pocono)		(Corporate and Other)
Gaming	$	170,482	$	51,453	$	—
Food and beverage	29,135		5,713		(42		)
Hotel	21,220		1,758		(1		)
Retail, entertainment and other	31,842		1,867		421
Management and development	—		—		5,712
Net revenues	$	252,679	$	60,791	$	6,090

Contract and Contract-Related Liabilities

There may exist a difference between the timing of cash receipts from patrons and the recognition of revenues, resulting in a contract or contract-related liability. In general, the Company has three types of liabilities: (1) outstanding gaming chips and slot tickets liability, which represents amounts owed in exchange for outstanding gaming chips and slot tickets held by patrons, (2) loyalty points deferred revenue liability, as discussed above, and (3) patron advances and other liability, which primarily represents funds deposited in advance by patrons for gaming and advance payments by patrons for goods and services, such as advance ticket sales, deposits on rooms and convention space and gift card purchases. These liabilities are generally expected to be recognized as revenues within one year and are recorded within other current liabilities on the Company’s condensed consolidated balance sheets.

The following table summarizes these liabilities (in thousands):



	December 31, 2018		October 1, 2018		Increase/ (Decrease)
Outstanding gaming chips and slot tickets liability	$	6,690	$	3,298	$	3,392
Loyalty points deferred revenue liability	$	41,061	$	42,314	$	(1,253	)
Patron advances and other liability	$	20,029	$	17,530	$	2,499

ASU 2016-18

In November 2016, the FASB issued ASU 2016-18, “Statement of Cash Flows (Topic 230): Restricted Cash” (“ASU 2016-18”). ASU 2016-18 requires that a statement of cash flows explain the total change during the period in cash, cash equivalents and amounts generally described as restricted cash or restricted cash equivalents. The Company adopted ASU 2016-18 in its first quarter of fiscal 2019 on a retrospective basis. Transfers between cash, cash equivalents and amounts generally described as restricted cash or restricted cash equivalents are no longer included within investing activities and, as such, the details of such transfers are not reported as cash flow activities in the statement of cash flows. This resulted in a $13.4 million change to net cash flows used in investing activities for the three months ended December 31, 2017.

ASU 2016-02

In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842)” (“ASU 2016‑02”), which will require, among other things, lessees to recognize a right-of-use asset and a lease liability for leases with terms in excess of 12 months and the disclosure of key information about leasing arrangements. In July 2018, the FASB issued ASU No. 2018-11, “Leases (Topic 842): Targeted Improvements” and ASU No. 2018-10, “Codification Improvements to Topic 842, Leases”, which clarified various aspects of this new standard. ASU 2016‑02 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018, with early adoption permitted. ASU 2016-02 provides various optional practical expedients in transition, which the Company continues to evaluate. The Company expects to adopt ASU 2016-02 in its first quarter of fiscal 2020, on a modified retrospective basis, and will recognize the cumulative effect of its adoption as an adjustment to retained earnings as of October 1, 2019. While the Company continues to evaluate the impact ASU 2016-02 will have on its financial statements and related disclosures, the actual impact of this standard will be dependent upon the Company’s lease portfolio at the time of adoption. The adoption of this standard is expected to have a material impact on the Company’s financial statements, as the Company has significant operating lease commitments that are off-balance sheet under current US GAAP.

ASU 2018-13

In August 2018, the FASB issued ASU 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement” (“ASU 2018-13”), which adds, amends and removes certain disclosure requirements related to fair value measurements. ASU 2018-13 requires enhanced disclosures on valuation techniques and inputs that a reporting entity uses to determine its measures of fair value, including judgments and assumptions that the entity makes and the uncertainties in the fair value measurements as of the reporting date. ASU 2018-13 is effective for annual reporting periods beginning after December 15, 2019. Certain amended or eliminated disclosure requirements may be adopted earlier, while certain additional disclosure requirements can be adopted on its effective date. In addition, certain changes required by this standard require retrospective adoption, while other changes must be adopted prospectively. The Company is currently evaluating the impact this standard will have on its financial statements.