
3.	REVENUE RECOGNITION

Adoption of the New Revenue Standard

Effective January 1, 2018, the Company adopted the new revenue standard using the modified retrospective method. Results for reporting periods beginning after January 1, 2018 are presented under the new revenue standard; however, the comparative prior period amounts have not been restated and continue to be reported in accordance with historic accounting under ASC Topic 605. The majority of the Company's revenue continues to be recognized at the completion of a homesale transaction under the new revenue standard, however as a result of the adoption the Company recognized additional contract liabilities and deferred assets associated with certain other revenue streams. As of January 1, 2018, the Company recorded a net debit to its opening Accumulated deficit of $22 million, net of tax, due to the cumulative impact of adopting the new revenue standard, with the impact primarily related to the recognition of additional contract liabilities for initial area development fees and deferred assets for prepaid commissions.

Contract Liabilities for Initial Area Development Fees ("ADF"):

Contract liabilities are recorded when cash payments are received or due in advance of the Company's performance. The Company records these as deferred revenues and are classified as current or non-current liabilities in the Consolidated Balance Sheets based on the expected timing of revenue recognition.

The Real Estate Franchise Services segment collects an initial ADF for international territory transactions, which are recorded as deferred revenue when received and recognized into revenue over the term of the agreement, typically 25 years, as consideration for the right to access and benefit from Realogy’s brands. In the event an ADF agreement is terminated prior to the end of its term, the unamortized deferred revenue balance will be recognized into revenue immediately upon termination. ADFs were recognized as revenue upfront when received under historical guidance.

Prepaid Commissions:

The incremental direct costs of obtaining a contract, which primarily consist of franchise sales commissions, are deferred and amortized generally over the estimated life of the customer relationship for domestic and international contracts. The Company classifies prepaid commissions as current or non-current assets in the Consolidated Balance Sheets based on the expected timing of recognizing expense.

The Real Estate Franchise Services segment recognizes a deferred asset for commissions paid to Realogy franchise sales employees upon the sale of a new franchise. The amount of commissions is calculated as a percentage of the anticipated gross commission income of the new franchisee or the amount of the ADF and is amortized on a straight-line basis over the estimated life of franchise customer relationships, 30 years for domestic franchise agreements, or the agreement term for international franchise agreements which is generally 25 years. Franchise sales commissions were expensed upfront when paid under historical guidance.

Practical Expedients and Exemptions:

The Company elected to apply the practical expedient that only requires the Company to apply the revenue standard to contracts that were open as of the beginning of the earliest period presented which impacted the amount of prepaid commissions capitalized.

The majority of the Company's contracts are transactional in nature or have a duration of one-year or less. Accordingly, the Company does not disclose the value of unsatisfied performance obligations for contracts with an original expected length of one year or less.

The cumulative effect of the changes made to the Consolidated Balance Sheets for the adoption of the new revenue standard were as follows:



	Balance Sheet accounts prior to the new revenue standard adoption adjustments			Adjustments due to the adoption of the new revenue standard			Balance Sheet accounts after the new revenue standard adoption adjustments
ASSETS
Current assets:
Trade receivables	$	153		$	1		$	154
Other current assets	179			2			181
Total current assets	789			3			792
Other non-current assets	222			23			245
Total assets	$	7,337		$	26		$	7,363

LIABILITIES AND EQUITY
Current liabilities:
Accrued expenses and other current liabilities	$	478		$	2		$	480
Total current liabilities	955			2			957
Deferred income taxes	327			(8		)	319
Other non-current liabilities	212			54			266
Total liabilities	4,715			48			4,763
Equity:
Accumulated deficit (a)	(2,622		)	(22		)	(2,644		)
Accumulated other comprehensive loss (a)	(46		)	—			(46		)
Total stockholders' equity	2,618			(22		)	2,596
Total equity	2,622			(22		)	2,600
Total liabilities and equity	$	7,337		$	26		$	7,363

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(a)

Beginning balances have been adjusted for the adoption of the accounting standard update on stranded tax effects related to the 2017 Tax Act which resulted in a debit to Accumulated other comprehensive loss and a credit to Accumulated deficit of $9 million. See Note 2, "Summary of Significant Accounting Policies" in the "Recently Adopted Accounting Pronouncements" section for additional information.

The impact of adopting the new revenue standard, as compared to historic guidance under ASC Topic 605, was immaterial to the Company's Consolidated Financial Statements as of and for the year ended December 31, 2018.

Revenue Recognition

Revenue is recognized upon the transfer of control of promised services to customers in an amount that reflects the consideration the Company expects to receive in exchange for those services in accordance with the new revenue standard. The Company's revenue is disaggregated by major revenue categories on our Consolidated Statements of Operations and further disaggregated by business segment as follows:



	Years Ended December 31, 2018 vs December 31, 2017 (e)
	Real Estate Franchise Services				Company Owned Brokerage Services				Relocation Services				Title and Settlement Services				Corporate and Other						Total Company
	2018		2017		2018		2017		2018		2017		2018		2017		2018			2017			2018		2017
Gross commission income (a)	$	—	$	—	$	4,533	$	4,576	$	—	$	—	$	—	$	—	$	—		$	—		$	4,533	$	4,576
Service revenue (b)	—		—		9		9		374		378		564		551		—			—			947		938
Franchise fees (c)	688		695		—		—		—		—		—		—		(295		)	(299		)	393		396
Other (d)	132		135		65		58		4		4		16		19		(11		)	(12		)	206		204
Net revenues	$	820	$	830	$	4,607	$	4,643	$	378	$	382	$	580	$	570	$	(306	)	$	(311	)	$	6,079	$	6,114



	Years Ended December 31, 2017 vs December 31, 2016 (e)
	Real Estate Franchise Services				Company Owned Brokerage Services				Relocation Services				Title and Settlement Services				Corporate and Other						Total Company
	2017		2016		2017		2016		2017		2016		2017		2016		2017			2016			2017		2016
Gross commission income (a)	$	—	$	—	$	4,576	$	4,277	$	—	$	—	$	—	$	—	$	—		$	—		$	4,576	$	4,277
Service revenue (b)	—		—		9		3		378		401		551		551		—			—			938		955
Franchise fees (c)	695		654		—		—		—		—		—		—		(299		)	(282		)	396		372
Other (d)	135		127		58		64		4		4		19		22		(12		)	(11		)	204		206
Net revenues	$	830	$	781	$	4,643	$	4,344	$	382	$	405	$	570	$	573	$	(311	)	$	(293	)	$	6,114	$	5,810

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(a)	Approximately 75% of the Company's total net revenues related to gross commission income at the Company Owned Brokerage Services segment, which is recognized at a point in time at the closing of a homesale transaction.

(b)

Approximately 15% of the Company's total net revenues related to service fees primarily consisting of title and escrow fees at the Title and Settlement Services segment, which are recognized at a point in time at the closing of a homesale transaction, and relocation fees at the Relocation Services segment, which are recognized as revenue when or as the related performance obligation is satisfied, which is dependent on the type of service performed. Relocation fees at the Relocation Services segment primarily include: (i) referral fees which are recognized at a point in time of the closing of a homesale transaction, (ii) outsourcing fees, which are management fees charged to clients frequently related to a bundle of relocation services performed and are recognized over the average time period to complete a move, and (iii) referral commissions from third party suppliers which are recognized at the time of the completion of the related service.


(c)	Approximately 5% of the Company's total net revenues related to franchise fees at the Real Estate Franchise Services segment, primarily domestic royalties, which are recognized at a point in time when the underlying franchisee revenue is earned (upon close of the homesale transaction).


(d)	Approximately 5% of the Company's total net revenues related to other revenue, which comprised of brand marketing funds received at the Real Estate Franchise Services segment from franchisees and other miscellaneous revenues across all of the business segments.


(e)	Prior period amounts have not been adjusted under the modified retrospective method.

The Company's revenue streams are discussed further below by business segment:

Real Estate Franchise Services

The Company franchises its real estate brands to real estate brokerage businesses that are independently owned and operated. Franchise revenue principally consists of royalty and marketing fees from the Company’s franchisees. The royalty received is primarily based on a gross percentage (generally 6%) of the franchisee’s gross commission income. Royalty fees are accrued as the underlying franchisee revenue is earned (upon close of the homesale transaction). Annual volume incentives given to certain franchisees on royalty fees are recorded as a reduction to revenue and are accrued for in relative proportion to the recognition of the underlying gross franchise revenue. Non-standard sales incentives are recorded as a reduction to revenue ratably over the related performance period or from the date of issuance through the remaining life of the related franchise agreement. Franchise revenue also includes domestic initial franchise fees which are generally non-refundable and recognized by the Company as revenue upon the execution or opening of a new franchisee office to cover the upfront costs associated with opening the franchisee for business under one of Realogy’s brands.

The Company also earns marketing fees from its franchisees and utilizes such fees to fund marketing campaigns on behalf of its franchisees. As such, brand marketing fund fees are recorded as deferred revenue when received and recognized into revenue as earned when these funds are spent on marketing activities. The balance for deferred brand marketing fund fees decreased from $13 million at January 1, 2018 to $12 million at December 31, 2018 primarily due to amounts recognized into revenue matching expenses for marketing activities, partially offset by additional fees received from franchisees during the year ended December 31, 2018.

The Company collects initial ADFs for international territory transactions, which are recorded as deferred revenue when received and recognized into franchise revenue over the average 25 year life of the related franchise agreement as consideration for the right to access and benefit from Realogy’s brands. The balance for deferred ADFs decreased from $58 million at January 1, 2018 to $54 million at December 31, 2018 due to revenues of $5 million recognized during the year ended December 31, 2018 that were included in the deferred revenue balance at the beginning of the period, partially offset by $1 million of additional area development fees received during the year ended December 31, 2018.

In addition, the Company recognizes a deferred asset for commissions paid to Realogy franchise sales employees upon the sale of a new franchise as these are considered costs of obtaining a contract with a customer that are expected to provide benefits to the Company for longer than one year. The amount of commissions is calculated as a percentage of the anticipated gross commission income of the new franchisee or ADF and is amortized over 30 years for domestic franchise agreements or the agreement term for international franchise agreements (generally 25 years). The amount of prepaid commissions was $24 million at January 1, 2018 and $25 million at December 31, 2018.

Company Owned Real Estate Brokerage Services

As an owner-operator of real estate brokerages, the Company assists home buyers and sellers in listing, marketing, selling and finding homes. Real estate commissions earned by the Company’s real estate brokerage business are recorded as revenue at a point in time which is upon the closing of a real estate transaction (i.e., purchase or sale of a home). These revenues are referred to as gross commission income. The commissions the Company pays to real estate agents are recognized concurrently with associated revenues and presented as the commission and other agent-related costs line item on the accompanying Consolidated Statements of Operations.

The Company has relationships with developers, primarily in major cities, to provide marketing and brokerage services in new developments. New development closings generally have a development period of between 18 and 24 months from contracted date to closing. In some cases, the Company receives advanced commissions which are recorded as deferred revenue when received and recognized as revenue when the new development closes. The balance of advanced commissions related to developments was a liability of $10 million at both January 1, 2018 and December 31, 2018. During the year ended December 31, 2018, the balance increased $6 million related to additional commissions received for new developments, offset by a $6 million decrease due to revenues recognized on units closed.

Relocation Services

The Company provides relocation services to corporate and government clients for the transfer of their employees ("transferees"). Such services include homesale assistance including the purchasing and/or selling of a transferee’s home and providing home equity advances to transferees (generally guaranteed by the individual's employer), arranging household goods moving services, and other relocation services such as expense processing, relocation policy counseling, relocation-related accounting, coordinating visa and immigration support, intercultural and language training and destination services. In the majority of relocation transactions, the gain or loss on the sale of a transferee’s home is generally borne by the individual's employer. Clients may pay an outsourcing management fee that can cover several of the relocation services listed above, according to the clients' specific needs. In addition, the Company provides home buying and selling assistance to members of Affinity organizations.

The Company earns referral commission revenue primarily from real estate brokers for the home sale and purchase for transferees and Affinity members, which is recognized at a point in time when the underlying property closes. Revenues from other third-party service providers where the Company earns a referral commission are recognized at the point in time at the completion of services. Furthermore, the Company generally earns interest income on the funds it advances on behalf of the transferring employee, which is recorded within other revenue (as is the corresponding interest expense on the securitization obligations) in the accompanying Consolidated Statements of Operations.

The Company earns revenues from outsourcing management fees charged to clients for the performance and facilitation of relocation services. Outsourcing management fees are recorded as deferred revenue when billed (usually at the start of the relocation) and are recognized as revenue over the average time period required to complete the transferee's move, or a phase of the move that the fee covers, which is typically 3 to 6 months depending on the move type. The balance for outsourcing management fees decreased from $5 million on January 1, 2018 to $4 million on December 31, 2018. During the year ended December 31, 2018, the balance increased $62 million primarily related to additions due to new management fees billed on new relocation files in advance of the Company satisfying its performance obligation, offset by a $63 million decrease as a result of revenues recognized as the performance obligations were satisfied.

The Relocation Services segment manages the Cartus Broker Network, which is a network of real estate brokers consisting of our company owned brokerage operations, select franchisees and independent real estate brokers who have been approved to become members. Network fees are billed in the fourth quarter of the previous year for the following year's membership. Starting with 2019 membership fees, the network fees were billed in the first quarter of 2019, resulting in a zero balance at the end of 2018. These fees are recognized into revenue on a straight-line basis each month during the membership period. The balance for Cartus Broker Membership decreased from $8 million at January 1, 2018 to zero at December 31, 2018 due to $12 million of revenues recognized during the year ended December 31, 2018 that were included in the deferred revenue balance at the beginning of the period, offset by a $4 million increase related to new network fees.

Title and Settlement Services

The Company provides title and closing services, which include title search procedures for title insurance policies, homesale escrow and other closing services. Title revenues and title and closing service fees are recorded at a point in time which occurs at the time a homesale transaction or refinancing closes. The Company also owns an underwriter of title insurance. For unaffiliated agents, the underwriter recognizes policy premium revenue on a gross basis (before deduction of agent commission) upon notice of policy issuance from the agent. For affiliated title agents, the underwriter recognizes the incremental policy premium revenue upon the effective date of the title policy as the agent commission revenue is already recognized by the affiliated title agent.

Contract Balances (Deferred Revenue)

The following table shows the change in the Company's contract liabilities related to revenue contracts by reportable segment for the period:



	Year Ended December 31, 2018
	Beginning Balance at January 1, 2018		Additions during the period		Recognized as Revenue during the period			Ending Balance at December 31, 2018
Real Estate Franchise Services (a)	$	79	$	118	$	(119	)	$	78
Company Owned Real Estate Brokerage Services	17		19		(18		)	18
Relocation Services	18		87		(96		)	9
Total	$	114	$	224	$	(233	)	$	105

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(a)	Revenues recognized include intercompany marketing fees paid by the Company Owned Real Estate Brokerage Services segment.