New Accounting Standards

In February 2016, the Financial Accounting Standards Board (“FASB”) issued new guidance on leases, which outlines principles for the recognition, measurement, presentation and disclosure of leases applicable to both lessors and lessees. The new guidance, which is effective beginning with our 2019 fiscal year, requires lessees to recognize on the balance sheet the assets and liabilities for the rights and obligations created by finance and operating leases with lease terms of more than 12 months. We are currently implementing a new lease management system to facilitate the adoption of this guidance. As shown in Note 13, there are $1,565,423 in future minimum rental payments for operating leases that are not currently on our balance sheet; therefore, we expect this will have a material impact on our consolidated balance sheets and related disclosures. We do not expect the adoption of this guidance to have a material impact on our consolidated statements of operations and statements of cash flows.

New Accounting Standards Adopted

In May 2017, the FASB issued new guidance on the scope of modification accounting for share-based payment arrangements. The new guidance provides relief to entities that make non-substantive changes to their share-based payment arrangements. The Company adopted this amendment, prospectively, during the first quarter of 2018. The adoption of this guidance did not impact our condensed consolidated financial statements.

In January 2017, the FASB issued an amendment that clarifies the definition of a business in determining whether to account for a transaction as an asset acquisition or a business combination. The Company adopted this amendment, prospectively, during the first quarter of 2018. The adoption of this guidance did not impact our condensed consolidated financial statements.

In November 2016, the FASB issued an amendment that clarifies guidance for proper classification and presentation of restricted cash in the statement of cash flows. Accordingly, changes in restricted cash that have historically been included within operating, investing and financing activities have been eliminated, and restricted cash, including the restricted cash of the national advertising funds, is combined with cash and cash equivalents when reconciling the beginning and end of period balances for all periods presented. The Company adopted this amendment during the first quarter of 2018. The adoption of the amendment resulted in an increase in net cash used in investing activities of $8,545 during the first quarter of 2017. In addition, net cash provided by operating activities during the first quarter of 2017 increased $3,468, primarily due to changes in restricted cash of the national advertising funds. Because of the inclusion of restricted cash in the beginning and end of period balances, cash, cash equivalents and restricted cash as presented in the statement of cash flows increased $72,670 and $77,709 as of April 2, 2017 and January 1, 2017, respectively. This amendment did not impact the Company’s condensed consolidated statements of operations and condensed consolidated balance sheets.

In August 2016, the FASB issued an amendment that provides guidance for proper classification of certain cash receipts and payments in the statement of cash flows. Upon adoption in the first quarter of 2018, the Company elected to use the nature of distribution approach for all distributions it receives from its equity method investees. The adoption of this guidance did not impact our condensed consolidated financial statements.

In March 2016, the FASB issued an amendment that provides guidance on extinguishing financial liabilities for certain prepaid stored-value products. The Company adopted this amendment during the first quarter of 2018. The adoption of this guidance did not impact our condensed consolidated financial statements.

In January 2016, the FASB issued an amendment that revises the accounting related to the classification and measurement of investments in equity securities and the presentation of certain fair value changes for financial liabilities measured at fair value. The Company adopted this amendment during the first quarter of 2018. The adoption of this guidance did not impact our condensed consolidated financial statements.

Revenue Recognition

In May 2014, the FASB issued amended guidance for revenue recognition. The new guidance outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers. The core principle of the guidance is that an entity should recognize revenue for the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services. Additionally, the guidance requires improved disclosure to help users of financial statements better understand the nature, amount, timing and uncertainty of revenue that is recognized. The Company adopted the new guidance on January 1, 2018. As a result, the Company has changed its accounting policy for revenue recognition as detailed below.

The Company applied the new guidance using the modified retrospective method, whereby the cumulative effect of initially adopting the guidance was recognized as an adjustment to the opening balance of equity at January 1, 2018. Therefore, the comparative period has not been adjusted and continues to be reported under the previous revenue recognition guidance. The details of the significant changes and quantitative impact of the changes are discussed below. See Note 3 for further information regarding our revenue policies and disaggregation of our sources of revenue.

Franchise Fees

Under previous revenue recognition guidance, new build technical assistance fees and development fees were recognized as revenue when a franchised restaurant opened, as all material services and conditions related to the franchise fee had been substantially performed upon the restaurant opening. In addition, under previous guidance, technical assistance fees received in connection with sales of Company-operated restaurants to franchisees and facilitating franchisee-to-franchisee restaurant transfers (“Franchise Flips”), as well as renewal fees, were recognized as revenue when the license agreements were signed and the restaurant opened. Under the new guidance, these franchise fees are considered highly dependent upon and interrelated with the franchise right granted in the franchise agreement. As such, these franchise fees are recognized over the contractual term of the franchise agreement.

National Advertising Funds

The Company maintains two national advertising funds (the “Advertising Funds”) established to collect and administer funds contributed for use in advertising and promotional programs for Company-operated and franchised restaurants in the U.S. and Canada. Previously, the revenue, expenses and cash flows of such Advertising Funds were not included in the Company’s condensed consolidated statements of operations and statements of cash flows because the contributions to these Advertising Funds were designated for specific purposes and the Company acted as an agent, in substance, with regard to these contributions as a result of industry-specific guidance. Under the new guidance, which superseded the previous industry-specific guidance, the revenue, expenses and cash flows of the Advertising Funds are fully consolidated into the Company’s condensed consolidated statements of operations and statements of cash flows. In addition, the Company reclassified the total stockholders’ equity of the Advertising Funds from “Advertising funds restricted liabilities” to “Accumulated deficit” upon adoption of the guidance. Upon the full consolidation of the Advertising Funds, the Company also eliminated certain amounts due to and from affiliates from “Advertising funds restricted assets” and “Advertising funds restricted liabilities.” The Company allocates a portion of its advertising funds expense to “Cost of sales” based on a percentage of sales of Company-operated restaurants. Our significant interim accounting policies include the recognition of advertising funds expense in proportion to advertising funds revenue.

Impacts on Financial Statements

The following table summarizes the impacts of adopting the revenue recognition standard on the Company’s condensed consolidated financial statements as of and for the three months ended April 1, 2018:



				Adjustments
	As Reported			Franchise Fees			Advertising Funds			Balances Without Adoption
Condensed Consolidated Balance Sheet
Accrued expenses and other current liabilities	$	99,307		$	(3,076	)	$	—		$	96,231
Advertising funds restricted liabilities	100,646			—			(6,645		)	94,001
Total current liabilities	250,106			(3,076		)	(6,645		)	240,385
Deferred income taxes	267,156			21,774			—			288,930
Deferred franchise fees	92,727			(81,482		)	—			11,245
Total liabilities	3,646,841			(62,784		)	(6,645		)	3,577,412
Accumulated deficit	(233,700		)	62,921			6,645			(164,134		)
Accumulated other comprehensive loss	(52,125		)	(137		)	—			(52,262		)
Total stockholders’ equity	462,997			62,784			6,645			532,426

Condensed Consolidated Statement of Operations
Franchise royalty revenue and fees (a)	$	97,908		$	(866	)	$	—		$	97,042
Advertising funds revenue	78,900			—			(78,900		)	—
Total revenues	380,564			(866		)	(78,900		)	300,798
Advertising funds expense	78,900			—			(78,900		)	—
Total costs and expenses	325,302			—			(78,900		)	246,402
Operating profit	55,262			(866		)	—			54,396
Income before income taxes	14,353			(866		)	—			13,487
Benefit from income taxes	5,806			222			—			6,028
Net income	20,159			(644		)	—			19,515

Condensed Consolidated Statement of Cash Flows
Cash flows from operating activities:
Net income	$	20,159		$	(644	)	$	—		$	19,515
Adjustments to reconcile net income to net cash provided by operating activities:
Deferred income tax	(9,799		)	(222		)	—			(10,021		)
Other, net	2,729			(337		)	—			2,392
Changes in operating assets and liabilities:
Accrued expenses and other current liabilities	(20,443		)	1,203			—			(19,240		)

_______________


(a)	Adjustment includes the reversal of franchise fees recognized over time under the new revenue recognition guidance of $2,688, as well as franchisee fees of $1,822 that would have been recognized under the previous revenue recognition guidance when the license agreements were signed and the restaurant opened. See Note 3 for further information.