New Accounting Standards

In August 2018, the Financial Accounting Standards Board (“FASB”) issued new guidance on accounting for implementation costs of a cloud computing arrangement that is a service contract. The new guidance aligns the accounting for such implementation costs of a cloud computing arrangement that is a service contract with the guidance on capitalizing costs associated with developing or obtaining internal-use software. The Company does not expect the amendment, which is effective beginning with our 2019 fiscal year, to have a material impact on our consolidated financial statements.

In August 2018, the FASB issued new guidance on disclosure requirements for fair value measurements. The objective of the new guidance, which is effective beginning with our 2020 fiscal year, is to provide additional information about assets and liabilities measured at fair value in the statement of financial position or disclosed in the notes to financial statements. New incremental disclosure requirements include the amount of fair value hierarchy level 3 changes in unrealized gains and losses and the range and weighted average used to develop significant unobservable inputs for level 3 fair value measurements. The Company does not expect the amendment to have a material impact on our consolidated financial statements.

In August 2018, the FASB issued new guidance on disclosure requirements for employer sponsored defined benefit plans. The amendments remove disclosure requirements that no longer are considered cost beneficial and add disclosure requirements that are identified as relevant. New incremental disclosure requirements include the weighted-average interest crediting rates for cash balance plans and other plans with promised interest crediting rates as well as an explanation of the reasons for significant gains and losses related to changes in the benefit obligation for the period. The Company does not expect the amendment, which is effective beginning with our 2020 fiscal year, to have a material impact on our consolidated financial statements.

In June 2018, the FASB issued new guidance on nonemployee share-based payment arrangements. The new guidance aligns the requirements for nonemployee share-based payments with the requirements for employee share-based payments. The Company does not expect the amendment, which is effective beginning with our 2019 fiscal year, to have a material impact on our consolidated financial statements.

In February 2016, the 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. The guidance allows for either (1) a modified retrospective transition method under which the standard is applied at the beginning of the earliest period presented in the financial statements or (2) an alternative transition method under which the standard is applied at the adoption date and a cumulative-effect adjustment to the opening balance of retained earnings is recognized in the period of adoption. The Company currently plans to adopt the standard using the alternative transition method. We are currently implementing a new lease management system to facilitate the adoption of this guidance. As shown in Note 14, there are $1,546,470 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 $23,624 during the nine months ended October 1, 2017. In addition, during the nine months ended October 1, 2017, net cash provided by operating activities decreased $16,428, 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, our cash, cash equivalents and restricted cash as presented in the statement of cash flows increased $37,883 and $77,709 as of October 1, 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 tables summarize the impacts of adopting the revenue recognition standard on the Company’s condensed consolidated financial statements:



				Adjustments
	As Reported			Franchise Fees			Advertising Funds			Balances Without Adoption
Condensed Consolidated Balance Sheet
September 30, 2018
Accrued expenses and other current liabilities	$	120,203		$	(1,664	)	$	—		$	118,539
Advertising funds restricted liabilities	78,925			—			(6,645		)	72,280
Total current liabilities	339,103			(1,664		)	(6,645		)	330,794
Deferred income taxes	275,312			21,463			—			296,775
Deferred franchise fees	92,522			(81,686		)	—			10,836
Total liabilities	3,724,114			(61,887		)	(6,645		)	3,655,582
Retained earnings	146,983			62,011			6,645			215,639
Accumulated other comprehensive loss	(51,135		)	(124		)	—			(51,259		)
Total stockholders’ equity	783,318			61,887			6,645			851,850

Condensed Consolidated Statements of Operations
Three Months Ended September 30, 2018
Franchise royalty revenue and fees (a)	$	103,212		$	(497	)	$	—		$	102,715
Advertising funds revenue	81,541			—			(81,541		)	—
Total revenues	400,550			(497		)	(81,541		)	318,512
Advertising funds expense	81,541			—			(81,541		)	—
Total costs and expenses	323,202			—			(81,541		)	241,661
Operating profit	77,348			(497		)	—			76,851
Income before income taxes	498,917			(497		)	—			498,420
Provision for income taxes	(107,668		)	124			—			(107,544		)
Net income	391,249			(373		)	—			390,876

Nine Months Ended September 30, 2018
Franchise royalty revenue and fees (a)	$	308,679		$	(2,087	)	$	—		$	306,592
Advertising funds revenue	245,011			—			(245,011		)	—
Total revenues	1,192,116			(2,087		)	(245,011		)	945,018
Advertising funds expense	245,011			—			(245,011		)	—
Total costs and expenses	988,023			—			(245,011		)	743,012
Operating profit	204,093			(2,087		)	—			202,006
Income before income taxes	555,534			(2,087		)	—			553,447
Provision for income taxes	(114,250		)	533			—			(113,717		)
Net income	441,284			(1,554		)	—			439,730

_______________

(a)

The adjustments for the three and nine months ended September 30, 2018 include the reversal of franchise fees recognized over time under the new revenue recognition guidance of $2,266 and $7,393, respectively, as well as franchisee fees that would have been recognized under the previous revenue recognition guidance when the license agreements were signed and the restaurant opened of $1,769 and $5,306, respectively. See Note 3 for further information.



				Adjustments
	As Reported			Franchise Fees			Advertising Funds		Balances Without Adoption
Condensed Consolidated Statement of Cash Flows
Nine Months Ended September 30, 2018
Cash flows from operating activities:
Net income	$	441,284		$	(1,554	)	$	—	$	439,730
Adjustments to reconcile net income to net cash provided by operating activities:
Deferred income tax	(1,527		)	(533		)	—		(2,060		)
Other, net	4,596			(219		)	—		4,377
Changes in operating assets and liabilities:
Accrued expenses and other current liabilities	89,806			2,306			—		92,112