Revenue Recognition

Revenue from Contracts with Customers

We transitioned to FASB Accounting Standards Codification (“ASC”) Topic 606, Revenue From Contracts with Customers (“ASC 606”), from ASC Topic 605, Revenue Recognition and ASC Subtopic 952-605, Franchisors - Revenue Recognition (together, the “Previous Standards”) on January 1, 2018 using the modified retrospective transition method. Our Financial Statements reflect the application of ASC 606 guidance beginning in 2018, while our consolidated financial statements for prior periods were prepared under the guidance of the Previous Standards. The $249.8 million cumulative effect of our transition to ASC 606 is reflected as an adjustment to January 1, 2018 Shareholders' equity.

Our transition to ASC 606 represents a change in accounting principle. ASC 606 eliminates industry-specific guidance and provides a single revenue recognition model for recognizing revenue from contracts with customers. The core principle of ASC 606 is that a reporting entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the reporting entity expects to be entitled for the exchange of those goods or services.

Revenue Recognition Significant Accounting Policies under ASC 606

Our revenues are comprised of sales and franchise and property revenues, which are detailed as follows:

Sales

Sales consist primarily of supply chain sales, which represent sales of products, supplies and restaurant equipment to franchisees, as well as sales to retailers. Orders placed by customers specify the goods to be delivered and transaction prices for supply chain sales. Revenue is recognized upon transfer of control over ordered items, generally upon delivery to the customer, which is when the customer obtains physical possession of the goods, legal title is transferred, the customer has all risks and rewards of ownership and an obligation to pay for the goods is created. Shipping and handling costs associated with outbound freight for supply chain sales are accounted for as fulfillment costs and classified as cost of sales.

Commencing on January 1, 2018, we classify all sales of restaurant equipment to franchisees as Sales and related cost of equipment sold as Cost of sales. In periods prior to January 1, 2018, we classified sales of restaurant equipment at establishment of a restaurant and in connection with renewal or renovation as Franchise and property revenues and related costs as Franchise and property expense.

To a much lesser extent, sales also include Company restaurant sales (including Restaurant VIEs), which consist of sales to restaurant guests. Revenue from Company restaurant sales is recognized at the point of sale. Taxes assessed by a governmental authority that we collect are excluded from revenue.

Franchise and Property Revenues

Franchise revenues

Franchise revenues consist primarily of royalties, advertising fund contributions, initial and renewal franchise fees and upfront fees from development agreements and master franchise and development agreements (“MFDAs”). Under franchise agreements, we provide franchisees with (a) a franchise license, which includes a license to use our intellectual property and, in those markets where our subsidiaries manage an advertising fund, advertising and promotion management, (b) pre-opening services, such as training and inspections, and (c) ongoing services, such as development of training materials and menu items and restaurant monitoring and inspections. The services we provide are highly interrelated and dependent upon the franchise license and we concluded the services do not represent individually distinct performance obligations. Consequently, we bundle the franchise license performance obligation and promises to provide services into a single performance obligation under ASC 606, which we satisfy by providing a right to use our intellectual property over the term of each franchise agreement.

Royalties, including franchisee contributions to advertising funds managed by our subsidiaries, are calculated as a percentage of franchise restaurant sales over the term of the franchise agreement. Under our franchise agreements, advertising contributions paid by franchisees must be spent on advertising, product development, marketing and related activities. Initial and renewal franchise fees are payable by the franchisee upon a new restaurant opening or renewal of an existing franchise agreement. Our franchise agreement royalties, inclusive of advertising fund contributions, represent sales-based royalties that are related entirely to our performance obligation under the franchise agreement and are recognized as franchise sales occur. Additionally, under ASC 606, initial and renewal franchise fees are recognized as revenue on a straight-line basis over the term of the respective agreement. Under the Previous Standards, initial franchise fees were recognized as revenue when the related restaurant commenced operations and our completion of all material services and conditions. Renewal franchise fees were recognized as revenue upon execution of a new franchise agreement. Our performance obligation under development agreements other than MFDAs generally consists of an obligation to grant exclusive development rights over a stated term. These development rights are not distinct from franchise agreements, so upfront fees paid by franchisees for exclusive development rights are deferred and apportioned to each franchise restaurant opened by the franchisee. The pro rata amount apportioned to each restaurant is accounted for as an initial franchise fee.

We have a distinct performance obligation under our MFDAs to grant subfranchising rights over a stated term. Under the terms of MFDAs, we typically either receive an upfront fee paid in cash and/or receive noncash consideration in the form of an equity interest in the master franchisee or an affiliate of the master franchisee. We previously accounted for noncash consideration as a nonmonetary exchange and did not record revenue or a basis in the equity interest received in arrangements where we received noncash consideration. These transactions now fall within the scope of ASC 606, which requires us to record investments in the applicable equity method investee and recognize revenue in an amount equal to the fair value of the equity interest received. Upfront fees from master franchisees, including the fair value of noncash consideration, are deferred and amortized over the MFDA term on a straight-line basis. We may recognize unamortized upfront fees when a contract with a franchisee or master franchisee is modified and is accounted for as a termination of the existing contract.

The portion of gift cards sold to customers which are never redeemed is commonly referred to as gift card breakage. Under ASC 606, we recognize gift card breakage income proportionately as each gift card is redeemed using an estimated breakage rate based on our historical experience. Under the Previous Standards, we recognized gift card breakage income for each gift card's remaining balance when redemption of that balance was deemed remote.

Property Revenues

Property revenues are accounted for in accordance with applicable accounting guidance for leases and are excluded from the scope of ASC 606. See Note 2, Significant Accounting Policies, to our consolidated financial statements included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2017 for our property revenue accounting policies.

Contract Liabilities

Contract liabilities consist of deferred revenue resulting from initial and renewal franchise fees paid by franchisees, as well as upfront fees paid by master franchisees, which are generally recognized on a straight-line basis over the term of the underlying agreement. We classify these contract liabilities as Other liabilities, net in our condensed consolidated balance sheets. The following table reflects the change in contract liabilities between the date of adoption (January 1, 2018) and September 30, 2018 (in millions):



	Contract Liabilities
Balance at January 1, 2018	$	455.0
Revenue recognized that was included in the contract liability balance at the beginning of the year	(39.6		)
Increase, excluding amounts recognized as revenue during the period	57.5
Impact of foreign currency translation	(10.5		)
Balance at September 30, 2018	$	462.4

The following table illustrates estimated revenues expected to be recognized in the future related to performance obligations that are unsatisfied (or partially unsatisfied) as of September 30, 2018 (in millions):



Contract liabilities expected to be recognized in	Amount
Remainder of 2018	$	9.3
2019	35.6
2020	34.9
2021	34.1
2022	33.3
Thereafter	315.2
Total	$	462.4

Disaggregation of Total Revenues

Total revenues consist of the following (in millions):



	Three Months Ended September 30,				Nine Months Ended September 30,
	2018		2017		2018		2017
Sales	$	609.1	$	631.6	$	1,743.1	$	1,784.1
Royalties	556.7		332.8		1,611.0		883.5
Property revenues	192.0		204.1		560.3		568.4
Franchise fees and other revenue	17.5		40.1		58.1		105.9
Total revenues	$	1,375.3	$	1,208.6	$	3,972.5	$	3,341.9

Financial Statement Impact of Transition to ASC 606

As noted above, we transitioned to ASC 606 using the modified retrospective method on January 1, 2018. The cumulative effect of this transition to applicable contracts with customers that were not completed as of January 1, 2018 was recorded as an adjustment to Shareholders' equity as of this date. As a result of applying the modified retrospective method to transition to ASC 606, the following adjustments were made to the consolidated balance sheet as of January 1, 2018 (in millions):



	As Reported			Total			Adjusted
	December 31, 2017			Adjustments			January 1, 2018
ASSETS
Current assets:
Cash and cash equivalents	$	1,097.4		$	—		$	1,097.4
Accounts and notes receivable, net	488.8			—			488.8
Inventories, net	78.0			—			78.0
Prepaids and other current assets	85.4			(23.0		)	62.4
Total current assets	1,749.6			(23.0		)	1,726.6
Property and equipment, net	2,133.3			—			2,133.3
Intangible assets, net	11,062.2			—			11,062.2
Goodwill	5,782.3			—			5,782.3
Net investment in property leased to franchisees	71.3			—			71.3
Other assets, net	424.8			106.6			531.4
Total assets	$	21,223.5		$	83.6		$	21,307.1
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts and drafts payable	$	496.2		$	—		$	496.2
Other accrued liabilities	865.7			8.9			874.6
Gift card liability	214.9			(43.0		)	171.9
Current portion of long term debt and capital leases	78.2			—			78.2
Total current liabilities	1,655.0			(34.1		)	1,620.9
Term debt, net of current portion	11,800.9			—			11,800.9
Capital leases, net of current portion	243.8			—			243.8
Other liabilities, net	1,455.1			425.7			1,880.8
Deferred income taxes, net	1,508.1			(58.2		)	1,449.9
Total liabilities	16,662.9			333.4			16,996.3
Shareholders’ equity:
Common shares	2,051.5			—			2,051.5
Retained earnings	650.6			(132.0		)	518.6
Accumulated other comprehensive income (loss)	(475.7		)	—			(475.7		)
Total RBI shareholders’ equity	2,226.4			(132.0		)	2,094.4
Noncontrolling interests	2,334.2			(117.8		)	2,216.4
Total shareholders’ equity	4,560.6			(249.8		)	4,310.8
Total liabilities and shareholders’ equity	$	21,223.5		$	83.6		$	21,307.1

Franchise Fees

The cumulative adjustment for franchise fees consists of the following:

•

A $320.7 million increase in Other liabilities, net for the cumulative reversal and deferral of previously recognized franchise fees related to franchise agreements in effect at January 1, 2018 that were entered into subsequent to the acquisitions of BK in 2010, TH in 2014 and PLK in 2017 (net of the cumulative revenue attributable for the period through January 1, 2018), with a corresponding decrease to Shareholders’ equity.

•

A $106.6 million increase in Other assets, net for the previously unrecognized value of equity interests received in connection with MFDA arrangements. This increase resulted in a corresponding increase in Other liabilities, net of $105.0 million and an increase to Shareholders' equity of $1.6 million for the cumulative effect of revenue attributable for the period between the inception of each such arrangement and January 1, 2018.


•	A $67.1 million decrease to Deferred income taxes, net for the tax effects of the two adjustments noted above, with a corresponding increase to Shareholders' equity.

Advertising Funds

The cumulative adjustment for advertising funds reflects the recognition of cumulative advertising expenditures temporarily in excess of cumulative advertising fund contributions as of January 1, 2018, which is reflected as a $23.0 million decrease in Prepaids and other current assets and a $23.0 million decrease to Shareholders’ equity.

Gift Card Breakage

The adjustment for gift card breakage reflects the impact of the change to recognize gift card breakage proportionately as gift card balances are used rather than when it is deemed remote that the unused gift card balance would be redeemed, as done under the Previous Standards. The cumulative effect of applying ASC 606 accounting to gift card balances outstanding at January 1, 2018 is reflected as a $43.0 million decrease in Gift card liability, an $8.9 million increase in Other accrued liabilities, an $8.9 million increase in Deferred income taxes, net and a $25.2 million increase in January 1, 2018 Shareholders' equity.

Comparison to Amounts if Previous Standards Had Been in Effect

The following tables reflect the impact of adoption of ASC 606 on our condensed consolidated statements of operations for the three and nine months ended September 30, 2018 and cash flows from operating activities for the nine months ended September 30, 2018 and our condensed consolidated balance sheet as of September 30, 2018 and the amounts as if the Previous Standards were in effect (“Amounts Under Previous Standards”) (in millions):

Condensed Consolidated Statement of Operations for the three and nine months ended September 30, 2018



	Three Months Ended September 30, 2018									Nine Months Ended September 30, 2018
	As Reported			Total Adjustments			Amounts Under Previous Standards			As Reported			Total Adjustments			Amounts Under Previous Standards
Revenues:
Sales	$	609.1		$	—		$	609.1		$	1,743.1		$	—		$	1,743.1
Franchise and property revenues	766.2			(193.3		)	572.9			2,229.4			(574.4		)	1,655.0
Total revenues	1,375.3			(193.3		)	1,182.0			3,972.5			(574.4		)	3,398.1
Operating costs and expenses:
Cost of sales	469.9			—			469.9			1,347.9			—			1,347.9
Franchise and property expenses	107.6			(0.2		)	107.4			314.4			(0.4		)	314.0
Selling, general and administrative expenses	298.3			(197.8		)	100.5			917.2			(588.4		)	328.8
(Income) loss from equity method investments	(3.8		)	(1.1		)	(4.9		)	(16.9		)	(4.7		)	(21.6		)
Other operating expenses (income), net	26.1			0.1			26.2			9.4			0.1			9.5
Total operating costs and expenses	898.1			(199.0		)	699.1			2,572.0			(593.4		)	1,978.6
Income from operations	477.2			5.7			482.9			1,400.5			19.0			1,419.5
Interest expense, net	134.9			(0.7		)	134.2			404.8			0.5			405.3
Income before income taxes	342.3			6.4			348.7			995.7			18.5			1,014.2
Income tax expense	92.5			0.9			93.4			152.9			4.1			157.0
Net income	249.8			5.5			255.3			842.8			14.4			857.2
Net income attributable to noncontrolling interests	116.2			2.6			118.8			393.8			6.8			400.6
Net income attributable to common shareholders	$	133.6		$	2.9		$	136.5		$	449.0		$	7.6		$	456.6

Earnings per common share:
Basic	$	0.53					$	0.54		$	1.81					$	1.84
Diluted	$	0.53					$	0.54		$	1.78					$	1.81

The following summarizes the adjustments to our condensed consolidated statement of operations for the three and nine months ended September 30, 2018 to reflect our condensed consolidated statement of operations as if we had continued to recognize revenue under the Previous Standards:

•

As described above, our transition to ASC 606 resulted in the deferral of franchise fees, recognition of franchise fees in connection with MFDAs where we received an equity interest in the equity method investee, and a change in the timing of recognizing gift card breakage income. The adjustments for the three and nine months ended September 30, 2018 to reflect the recognition of this revenue as if the Previous Standards were in effect consists of a $9.0 million and $14.0 million increase in Franchise and property revenue, respectively, and a $1.7 million and $4.1 million increase in Income tax expense, respectively.


•	The adjustments to (income) loss from equity method investments for the three and nine months ended September 30, 2018 reflect the amount of losses from equity method investments we would not have recognized if the Previous Standards were in effect. There is no tax impact related to these adjustments.

•

As described above, under the Previous Standards our statement of operations did not reflect gross presentations of advertising fund contributions and expenses. Our transition to ASC 606 requires the presentation of advertising fund contributions and advertising fund expenses on a gross basis. The adjustments for the three and nine months ended September 30, 2018 to reflect advertising fund contributions and expenses as if the Previous Standards were in effect consist of a $202.3 million and $588.4 million decrease in Franchise and property revenues, respectively, a $0.2 million and $0.4 million decrease in Franchise and property expenses, respectively, a $197.8 million and $588.4 million decrease in Selling, general and administrative expenses, respectively, a $0.7 million decrease in Interest expense, net for the three months ended September 30, 2018 and a $0.5 million increase in Interest expense, net for the nine months ended September 30, 2018, and a $0.8 million decrease in Income tax expense for the three months ended September 30, 2018 and no adjustment to Income tax expense for the nine months ended September 30, 2018.

Condensed Consolidated Statement of Cash Flows for the nine months ended September 30, 2018

The transition to ASC 606 had no net impact on our cash provided by operating activities and no impact on our cash used for investing activities or cash used for financing activities during the nine months ended September 30, 2018.



				Total			Amounts Under
	As Reported			Adjustments			Previous Standards
Cash flows from operating activities:
Net income	$	842.8		$	14.4		$	857.2
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	137.5			—			137.5
Amortization of deferred financing costs and debt issuance discount	21.9			—			21.9
(Income) loss from equity method investments	(16.9		)	(4.7		)	(21.6		)
Loss (gain) on remeasurement of foreign denominated transactions	(19.3		)	—			(19.3		)
Net losses on derivatives	(24.4		)	—			(24.4		)
Share-based compensation expense	39.3			—			39.3
Deferred income taxes	6.1			4.1			10.2
Other	11.1			—			11.1
Changes in current assets and liabilities, excluding acquisitions and dispositions:
Accounts and notes receivable	(0.3		)	—			(0.3		)
Inventories and prepaids and other current assets	(16.3		)	(1.1		)	(17.4		)
Accounts and drafts payable	(24.0		)	5.6			(18.4		)
Other accrued liabilities and gift card liability	(283.6		)	(3.5		)	(287.1		)
Other long-term assets and liabilities	(0.8		)	(14.8		)	(15.6		)
Net cash provided by operating activities	$	673.1		$	—		$	673.1

Condensed Consolidated Balance Sheet



	As Reported			Total			Amounts Under
	September 30, 2018			Adjustments			Previous Standards
ASSETS
Current assets:
Cash and cash equivalents	$	1,143.5		$	—		$	1,143.5
Accounts and notes receivable, net	481.4			—			481.4
Inventories, net	91.8			—			91.8
Prepaids and other current assets	48.7			24.1			72.8
Total current assets	1,765.4			24.1			1,789.5
Property and equipment, net	2,054.1			—			2,054.1
Intangible assets, net	10,821.0			—			10,821.0
Goodwill	5,680.0			—			5,680.0
Net investment in property leased to franchisees	58.0			—			58.0
Other assets, net	606.8			(101.9		)	504.9
Total assets	$	20,985.3		$	(77.8	)	$	20,907.5
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts and drafts payable	$	467.0		$	5.6		$	472.6
Other accrued liabilities	678.4			(13.2		)	665.2
Gift card liability	95.3			43.8			139.1
Current portion of long term debt and capital leases	79.6			—			79.6
Total current liabilities	1,320.3			36.2			1,356.5
Term debt, net of current portion	11,766.8			—			11,766.8
Capital leases, net of current portion	240.6			—			240.6
Other liabilities, net	1,738.5			(440.5		)	1,298.0
Deferred income taxes, net	1,524.7			62.3			1,587.0
Total liabilities	16,590.9			(342.0		)	16,248.9
Shareholders’ equity:
Common shares	2,155.7			—			2,155.7
Retained earnings	626.0			141.6			767.6
Accumulated other comprehensive income (loss)	(596.3		)	—			(596.3		)
Total RBI shareholders’ equity	2,185.4			141.6			2,327.0
Noncontrolling interests	2,209.0			122.6			2,331.6
Total shareholders’ equity	4,394.4			264.2			4,658.6
Total liabilities and shareholders’ equity	$	20,985.3		$	(77.8	)	$	20,907.5