REVENUE RECOGNITION

Adoption of ASC Topic 606, Revenues from Contracts with Customers

On January 1, 2018, the Company adopted ASC 606, Revenue from Contracts with Customers, using a modified retrospective method applied to all contracts as of January 1, 2018. Therefore, for reporting periods beginning after December 31, 2017, the financial statements are prepared in accordance with the current revenue standard and the financial statements for all periods prior to January 1, 2018 are presented under the previous revenue standard.

For periods beginning after December 31, 2017, the Company recognizes revenue for travel reservation services when the travel begins rather than when the travel is completed. For example, revenues for accommodation reservation services, which were principally recognized at check-out under the previous revenue standard, are now recognized at check-in under the current revenue standard. The Company currently expects that this timing change will not have a significant impact to its annual revenues and net income, although the effects on quarterly revenues and net income are expected to be more significant.

In addition, revenues from priceline's Name Your Own Price^® ("NYOP") transactions were previously presented on a gross basis with the amount remitted to the travel service providers reported as cost of revenues. Under the current revenue standard, NYOP revenues are reported on a net basis with the amount remitted to the travel service providers recorded as an offset in merchant revenues. Therefore, for periods beginning after December 31, 2017, the Company no longer presents "Cost of revenues" or "Gross profit" in its Consolidated Statements of Operations. Total revenues reported in 2018 are comparable to gross profit reported in previous years.

Billing and cash collections remain unchanged and, therefore, "Net cash provided by operating activities" as presented in the Consolidated Statements of Cash Flows is not impacted.

The Company recorded a net increase to its retained earnings of $188.5 million, net of tax, as of January 1, 2018, due to the cumulative impact of adopting the current revenue standard, with substantially all of the impact related to the Company’s travel reservation services. In addition, since the Company is using the modified retrospective method of adopting the current revenue standard, the Company is required to disclose the financial impacts to its Consolidated Balance Sheets and Consolidated Statements of Operations for all 2018 reporting periods (refer to the disclosures below for this additional information).

The cumulative effects of the revenue accounting changes on the Company's Unaudited Consolidated Balance Sheet as of January 1, 2018 were as follows (in thousands):



	Balance at December 31, 2017		Adjustments			Balance at January 1, 2018
ASSETS
Current assets:
Accounts receivable, net	$	1,217,801	$	205,324		$	1,423,125

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable	$	667,523	$	171,644		$	839,167
Accrued expenses and other current liabilities	1,138,980		44,374			1,183,354
Deferred merchant bookings	980,455		(201,647		)	778,808

Deferred income taxes	481,139		2,414			483,553

Stockholders' equity:
Retained earnings	13,938,869		188,539			14,127,408

The following tables summarize the impacts of adopting the current revenue standard (in thousands, except per share data):

Unaudited Consolidated Balance Sheets at June 30, 2018:



	As reported (current revenue standard)			Current period adjustments			As adjusted (previous revenue standard)
ASSETS
Current assets:
Accounts receivable, net	$	1,715,055		$	(148,982	)	$	1,566,073
Prepaid expenses and other current assets	985,901			37,573			1,023,474

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable	$	1,053,509		$	(110,170	)	$	943,339
Accrued expenses and other current liabilities	1,418,603			(8,883		)	1,409,720
Deferred merchant bookings	1,802,182			145,297			1,947,479

Deferred income taxes	502,581			(285		)	502,296

Stockholders' equity:
Retained earnings	15,953,078			(139,366		)	15,813,712
Accumulated other comprehensive income (loss)	(76,283		)	1,998			(74,285		)

Unaudited Consolidated Statements of Operations for the Three Months Ended June 30, 2018:



	As reported (current revenue standard)			Current period adjustments			As adjusted (previous revenue standard)

Agency revenues	$	2,566,293		$	(3,309	)	$	2,562,984
Merchant revenues	709,864			40,137			750,001
Advertising and other revenues	260,937			13			260,950
Cost of revenues				44,290			44,290

Operating expenses:
Performance marketing	1,141,893			(1,390		)	1,140,503
Sales and other expenses	203,593			(205		)	203,388
General and administrative	158,753			233			158,986
Foreign currency transactions and other	(15,046		)	(1,066		)	(16,112		)
Income tax expense	231,539			(1,011		)	230,528
Net income	977,372			(6,142		)	971,230
Net income applicable to common stockholders per basic common share	20.34			(0.13		)	20.21
Net income applicable to common stockholders per diluted common share	20.13			(0.13		)	20.00

Unaudited Consolidated Statements of Operations for the Six Months Ended June 30, 2018:



	As reported (current revenue standard)			Current period adjustments			As adjusted (previous revenue standard)

Agency revenues	$	4,679,632		$	52,678		$	4,732,310
Merchant revenues	1,236,331			101,677			1,338,008
Advertising and other revenues	549,332			104			549,436
Cost of revenues				89,950			89,950

Operating expenses:
Performance marketing	2,248,100			1,004			2,249,104
Sales and other expenses	369,393			—			369,393
General and administrative	320,892			1,034			321,926
Foreign currency transactions and other	(23,102		)	789			(22,313		)
Income tax expense	377,666			14,087			391,753
Net income	1,584,582			49,173		⁽¹⁾	1,633,755
Net income applicable to common stockholders per basic common share	32.87			1.02			33.89
Net income applicable to common stockholders per diluted common share	32.42			1.01			33.43

(1) The current period adjustment represents the net income recorded directly to retained earnings on January 1, 2018 of $188.5 million that would have been recognized in the first quarter of 2018 under the previous revenue standard, partially offset by $139.4 million that would have been recognized in the third quarter of 2018 under the previous revenue standard.

Revenue Recognition

Online travel reservation services

For periods beginning after December 31, 2017, the Company recognizes revenue for travel reservation services when the travel begins rather than when the travel is completed. Substantially all of the Company's revenues are generated by providing online travel reservation services, which principally allows travelers to book travel reservations (e.g., accommodation, rental car and airline ticket reservations) with travel service providers (i.e., a hotel or other accommodation, rental car company or airline) through the Company’s websites and mobile apps. While the Company generally refers to a consumer that books travel reservation services on the Company's platforms as its customer, for accounting purposes, the Company's "customers" are the travel service providers and, in certain merchant transactions, the travelers. The Company's contracts with the travel service providers give them the ability to market their reservation availability without transferring responsibility to deliver the travel service to the Company; therefore, the Company's revenues are presented on a net basis in the Consolidated Statements of Operations. These contracts include payment terms and establish the consideration to which the Company is entitled, which includes either a commission or a margin on the travel transaction. Revenue is measured based on the expected consideration specified in the contract with the travel service provider, considering the effects of sales incentives, "no show" cancellations (where the traveler has not cancelled the reservation and does not arrive on the scheduled reservation date) and "late" cancellations (where the travel service provider accepts a cancellation after its cancellation cut-off date). Estimates for cancellations are based on historical experience.

Online travel reservation services are recorded at a point in time when the Company has completed its post-booking services and the travelers begin using the arranged travel services. These services are classified into two categories:

•

Agency revenues are derived from travel-related transactions where the Company does not receive payments from travelers for the travel reservation services provided. The Company invoices the travel service providers for its commissions in the month that travel is completed. Agency revenues consist almost entirely of travel reservation commissions, as well as certain global distribution fees ("GDS"), reservation booking fees and certain travel insurance fees.

•

Merchant revenues are derived from services where the Company receives payments from travelers for the travel reservation services provided, generally at the time of booking. The Company records cash collected from travelers, which includes the amounts owed to the travel service providers and the Company’s commission or margin and fees, as deferred merchant bookings until the arranged travel service begins. Merchant revenues include net revenues (i.e., the amount charged to travelers less the amount owed to travel service providers) and travel reservation commissions in connection with our accommodation reservations and rental car services; ancillary fees, including damage excess waiver insurance and certain travel insurance fees and certain GDS reservation booking fees; and customer processing fees. Substantially all merchant revenues are for merchant services derived from transactions where travelers book accommodations reservations or rental car reservations from travel service providers.

Pursuant to the terms of the Company's merchant services, the travel service providers are permitted to bill the Company for the underlying cost of the services during a specified period of time. If the Company is not billed by the travel service providers within the specified period of time, the Company increases its revenue by the unbilled amounts.

Tax Recovery Charge, Occupancy Taxes and State and Local Taxes

For merchant transactions, the Company charges the traveler an amount intended to cover the taxes that the Company anticipates the travel service provider will remit to the local taxing authorities ("tax recovery charge"). Tax rate information for calculating the tax recovery charge is provided to the Company by the travel service providers.

In certain taxing jurisdictions, the Company is required by statute, regulation or court order to collect and remit certain local occupancy tax, general excise and/or sales tax (“transaction-related taxes”) imposed upon its margin and/or service fees. In other taxing jurisdictions, the Company is required to collect from the traveler and remit directly to the taxing jurisdiction transaction-related taxes imposed on the full amount of the transaction, which includes taxes on the margin, service fees and the underlying rate provided by the travel service provider. The rate information for calculating these taxes is provided to the Company directly from the taxing jurisdictions. The taxes collected from travelers are reported on a net basis in Revenues in the Unaudited Consolidated Statements of Operations.

Advertising and Other Revenues

Advertising and other revenues are primarily recognized by KAYAK and OpenTable and to a lesser extent by priceline for advertising placements on its website and Booking.com's BookingSuite branded accommodation marketing and business analytics services. KAYAK recognizes advertising revenue primarily by sending referrals to online travel companies ("OTCs") and travel service providers and from advertising placements on its websites and mobile apps. Revenue related to referrals is recognized when a customer clicks on a referral placement or upon completion of the travel. Revenue for advertising placements is recognized based upon when a customer clicks on an advertisement or when KAYAK displays an advertisement. OpenTable recognizes reservation fees when diners are seated through its online restaurant reservation service and subscription fees for restaurant management services on a straight-line basis over the contractual period in accordance with how the service is provided.

Loyalty Programs

The Company provides various loyalty programs, where participating travelers or diners are awarded loyalty incentives on current transactions that can be redeemed for future qualifying reservations booked with the travel service provider through the Company's websites or mobile apps or, in the case of OpenTable, at participating restaurants. The estimated fair value of the incentives that are expected to be redeemed is recognized as a reduction of revenues at the time the incentives are granted. In the first quarter of 2018, OpenTable introduced a three-year time-based expiration for points earned by diners, which resulted in a reduction of a portion of the loyalty liability of approximately $27 million. At June 30, 2018 and December 31, 2017, liabilities of $80.6 million and $104.7 million, respectively, for loyalty incentives were included in "Accrued expenses and other current liabilities" in the Unaudited Consolidated Balance Sheets.

The Company uses the portfolio approach to account for its loyalty points as the rewards programs share similar characteristics within each program in relation to the value provided to the traveler or diner and their breakage patterns. Using this portfolio approach is not expected to differ materially from applying the guidance to individual contracts.

Disaggregation of revenue

Geographic Information

The Company's international information consists of the results of Booking.com, Rentalcars.com (which began operating as part of Booking.com on January 1, 2018) and agoda.com and the results of the international businesses of KAYAK and OpenTable. This classification is independent of where the consumer resides, where the consumer is physically located while using the Company's services or the location of the travel service provider or restaurant. For example, a reservation made through Booking.com at a hotel in New York by a consumer in the United States is part of the Company's international results. The Company's geographic information is as follows (in thousands):



				International
Total revenues for the Three Months Ended June 30,	United States			The Netherlands		Other		Total
2018	$	423,267	⁽¹⁾	$	2,706,702	$	407,125	$	3,537,094	⁽¹⁾
2017	422,307		⁽²⁾	2,278,255		323,994		3,024,556		⁽²⁾

(1) Total revenues have been reduced for cost of revenues for NYOP transactions of $44.3 million in 2018.

(2) Total revenues have not been reduced for cost of revenues for NYOP transactions of $67.4 million in 2017.



				International
Total revenues for the Six Months Ended June 30,	United States			The Netherlands		Other		Total
2018	$	801,958	⁽¹⁾	$	4,829,426	$	833,911	$	6,465,295	⁽¹⁾
2017	821,492		⁽²⁾	3,965,558		656,910		5,443,960		⁽²⁾

(1) Total revenues have been reduced for cost of revenues for NYOP transactions of $90.0 million in 2018.

(2) Total revenues have not been reduced for the cost of revenues for NYOP transactions of $147.8 million in 2017.

Revenue by Type of Service

Approximately 86% of the Company's revenue for both the three and six months ended June 30, 2018, respectively, relates to online accommodation reservation services. Revenue from all other sources of online travel reservation services or advertising and other revenues each represent less than 10% of the Company's total revenues.

Deferred Revenue

Cash payments received from travelers in advance of the Company completing its service obligations are included in "Deferred merchant bookings" in the Company's Unaudited Consolidated Balance Sheets and are comprised principally of amounts owed to the travel service providers as well as the Company's deferred revenue for its commission or margin and fees. At June 30, 2018 and December 31, 2017, deferred merchant bookings includes deferred revenue of $293.0 million and $151.2 million, respectively. The Company expects to complete its service obligation within one year of booking. In the six months ended June 30, 2018, the Company recognized revenue of $97.6 million and cancellations of $9.1 million related to the deferred revenue balance at December 31, 2017. In addition, the Company reduced the December 31, 2017 balance by $32.4 million for the impact of the adoption of the current revenue standard on January 1, 2018. The offsetting increase in the deferred revenue balance for the six months ended June 30, 2018 is principally driven by payments received from travelers, net of amounts payable to travel service providers, of $287.3 million for those online travel reservations in the current period.