Accounting Standards Adopted Effective January 1, 2018

On January 1, 2018, the Company adopted the guidance of Accounting Standards Codification 606 - Revenue from Contracts with Customers (“ASC 606”). The Company adopted this change in accounting principles using the full retrospective method. Accordingly, previously reported financial information has been adjusted to reflect the application of ASC 606 to all comparative periods presented. The Company utilized all of the practical expedients for adoption allowed under the full retrospective method. The Company believes utilization of the practical expedients did not have a significant impact on the consolidated financial statements of the periods presented herein.

Adoption of ASC 606 impacted our previously reported Consolidated Balance Sheet as follows:



	Balance at December 31, 2017, as reported			Adjustments/Reclassifications Due to ASC 606 adoption			Balance at December 31, 2017, as adjusted
	(In thousands)
Assets:
Receivables, net	$	150,174		$	(9,986	)	$	140,188
Prepaid income taxes	43,654			2,327			45,981
Long-term receivables, net	131,212			(4,642		)	126,570

Liabilities:
Deferred franchise revenue (short-term)	—			11,001			11,001
Other accrued expenses	17,780			(1,779		)	16,001
Deferred franchise revenue (long-term)	—			70,432			70,432
Other non-current liabilities	23,003			(4,932		)	18,071
Deferred income taxes, net	138,177			(18,181		)	119,996

Equity:
Accumulated deficit	$	(1,098	)	$	(68,842	)	$	(69,940	)

In conjunction with its adoption of ASC 606, the Company has separated “franchise and restaurant revenues” and “franchise and restaurant expenses,” previously combined when reported in the Statement of Comprehensive Income for the three and six months ended June 30, 2017, into separate line items for franchise revenues/expense and company restaurant sales/expense as follows:



	Three months ended June 30, 2017		Six months ended June 30, 2017
	(in thousands)
Franchise and restaurant revenues, as combined	$	122,987	$	246,565

Franchise revenues	$	119,609	$	239,047
Company restaurant sales	3,378		7,518
	$	122,987	$	246,565

Franchise and restaurant expenses, as combined	$	40,669	$	81,676

Franchise expenses	37,222		73,886
Company restaurant expenses	3,447		$	7,790
	$	40,669	$	81,676

Adoption of ASC 606 impacted our previously reported Consolidated Statement of Comprehensive Income for the three months ended June 30, 2017, as follows:



	Three Months ended June 30, 2017, as reported			Adjustments due to ASC 606 adoption			Three Months ended June 30, 2017, as adjusted
	(In thousands)
Franchise revenues (as shown separately above)	$	119,609		$	33,455		$	153,064
Franchise expenses (as shown separately above)	37,222			32,300			69,522
Income before income tax provision	39,745			1,155			40,900
Income tax provision	(18,465		)	(328		)	(18,793		)
Net income	21,280			827			22,107
Net income per share:
Basic	$	1.18					$	1.23
Diluted	$	1.18					$	1.23

Recognition of Applebee's advertising revenue and expense comprised $32.3 million of the revenue adjustment and all of the expense adjustment. Approximately $1.2 million of the revenue adjustment is due to the change in method of recognizing franchise and development fees. See Note 4 - Revenue Disclosures, of the Notes to Consolidated Financial Statements for a description of these changes.

Adoption of ASC 606 impacted our previously reported Consolidated Statement of Comprehensive Income for the six months ended June 30, 2017, as follows:



	Six Months ended June 30, 2017, as reported			Adjustments due to ASC 606 adoption			Six Months ended June 30, 2017, as adjusted
	(In thousands)
Franchise revenues (as shown separately above)	$	239,047		$	68,742		$	307,789
Franchise expenses (as shown separately above)	73,886			65,803			139,689
Income before income tax provision	63,970			2,939			66,909
Income tax provision	(28,327		)	(880		)	(29,207		)
Net income	35,643			2,059			37,702
Net income per share:
Basic	$	1.98					$	2.09
Diluted	$	1.98					$	2.09

Recognition of Applebee's advertising revenue and expense comprised $65.8 million of the revenue adjustment and all of the expense adjustment. Approximately $2.9 million of the revenue adjustment is due to the change in method of recognizing franchise and development fees. See Note 4 - Revenue Disclosures, of the Notes to Consolidated Financial Statements for a description of these changes.

The adoption of ASC 606 had no impact on the Company's cash provided by or used in operating, investing or financing activities as previously reported in its Consolidated Statements of Cash Flows.

Additional new accounting guidance became effective for the Company as of January 1, 2018 that the Company reviewed and concluded was either are not applicable to the Company's operations or had no material effect on the Company's consolidated financial statements.

Newly Issued Accounting Standards Not Yet Adopted

In June 2016, the FASB issued new guidance on the measurement of credit losses on financial instruments. The new guidance will replace the incurred loss methodology of recognizing credit losses on financial instruments that is currently required with a methodology that estimates the expected credit loss on financial instruments and reflects the net amount expected to be collected on the financial instrument. Application of the new guidance may result in the earlier recognition of credit losses as the new methodology will require entities to consider forward-looking information in addition to historical and current information used in assessing incurred losses. The Company will be required to adopt the new guidance on a modified retrospective basis beginning with its first fiscal quarter of 2020, with early adoption permitted in its first fiscal quarter of 2019. The Company is currently evaluating the impact of the new guidance on its consolidated financial statements and related disclosures and whether early adoption will be elected.

In February 2016, the FASB issued new guidance with respect to the accounting for leases. The new guidance will require lessees to recognize a right-of-use asset and a lease liability for virtually all leases, other than leases with a term of 12 months or less, and to provide additional disclosures about leasing arrangements. Accounting by lessors is largely unchanged from existing accounting guidance. The Company will be required to adopt the new guidance on a modified retrospective basis beginning with its first fiscal quarter of 2019. Early adoption is permitted.

While the Company is still in the process of evaluating the impact of the new guidance on its consolidated financial statements and disclosures, the Company expects adoption of the new guidance will have a material impact on its Consolidated Balance Sheets due to recognition of the right-of-use asset and lease liability related to its operating leases. While the new guidance is also expected to impact the measurement and presentation of elements of expenses and cash flows related to leasing arrangements, the Company does not presently believe there will be a material impact on its Consolidated Statements of Comprehensive Income or Consolidated Statements of Cash Flows. Recognition of a lease liability related to operating leases will not impact any covenants related to the Company's long-term debt because the debt agreements specify that covenant ratios be calculated using U.S. GAAP in effect at the time the debt agreements were entered into.

The Company reviewed all other newly issued accounting pronouncements and concluded that they either are not applicable to the Company's operations or that no material effect is expected on the Company's financial statements because of future adoption.