NOTE 2. REVENUE RECOGNITION

On January 1, 2018, the Company adopted accounting standard update No. 2014-09 (“ASC 606”) and all the related amendments to all contracts (“new revenue standard”). The Company applied the modified retrospective method and recognized a $4.86 million cumulative effect adjustment to the opening balance of retained earnings with the adoption of the new revenue standard. This adjustment exclusively related to the change in the accounting for the slot club liability from the immediate revenue/cost method to the deferred revenue method. Financial results for the three and six months ended June 30, 2017 have not been restated and are reported under the accounting standards in effect during that period.

Players’ Club Program: The Company operates a players’ club program under which as players perform gaming activities they earn and accumulate points, which may be redeemed for a variety of goods and services. Points may be applied toward hotel room stays, food and beverage consumption at the food outlets, gift shop items, as well as goods and services at the spa and beauty salon and for cash in our Monarch Casino Black Hawk property. Points earned may also be applied toward off-property events such as concerts, shows and sporting events. The point balance under the players’ club program is forfeited if the member does not earn or use any points over a twelve-month period.

A large portion of our revenues are generated by customers who are members of our players’ club. Given the significance of the players’ club program and the ability for members to bank such points based on their past play, we have determined that players’ club program points granted in conjunction with gaming activity constitute a material right and, as such, represent a performance obligation associated with the gaming contracts.

We have determined the points estimated standalone selling prices (“SSP”) by computing the cash redemption value of the points expected to be redeemed by type of good or service. This cash redemption value is determined through an analysis of all redemption activity over the preceding twelve-month period, leveraging the fair market value of the goods and services provided through redemption of points as the means for determining the fair market value of such points as points are not otherwise independently sold. Because of the similarity of gaming and other transactions, we have applied the practical expedient under the portfolio approach as prescribed in ASC paragraph 606-10-10-4 to apply to our loyalty credit transactions.

Prior to the adoption of the ASC 606, at the time points are earned, which occurs commensurate with casino patron play, we recognized a liability for points outstanding based on the average cost of the goods and services expected to be redeemed, with a corresponding increase in casino expenses. After the adoption of the ASC 606, at the time points are earned, we recognize deferred revenue at the standalone selling prices of the goods and services that the points are expected to be redeemed for, with a corresponding decrease in gaming revenue. As of June 30, 2018 we had estimated the obligations related to the players’ club program at $9.0 million, which is included in Accrued Expenses in the Liabilities and Stockholders’ Equity section in the Condensed Consolidated Balance Sheet. Estimates and assumptions made regarding breakage rates and the combination of goods and services members will choose impacts the estimated SSP of the points. We use historical data to assist in the determination of estimated accruals. Changes in estimates or member redemption patterns could produce different results.

The majority of the Company’s revenue continues to be recognized when products are delivered or services are performed. For certain revenue transactions (when a patron uses a club loyalty card), a portion of the revenue is deferred until the points earned by the patron are redeemed or expire.

The new revenue standard also resulted in reclassifications to or from revenues, promotional allowances and operating expenses. Pursuant to the new Financial Accounting Standards Board (“FASB”) guidelines, food and beverage, hotel and other complimentaries are now valued at their retail price and included as revenues within their respective categories, with a corresponding decrease in gaming revenues, as the offsetting amount historically included in promotional allowances has been eliminated. In addition, the cost of providing these complimentary goods and services are now included as expenses within their respective categories, resulting in a corresponding decrease in casino expenses. While those changes have resulted in a $171 thousand and $316 thousand increase in net revenue for the three and six months ended June 30, 2018, respectively, the adoption of the new revenue standard had no impact on the net income.

In accordance with the new revenue standard requirements, below is a disclosure of the impact of the adoption of ASC 606 on our consolidated income statement for the period ended June 30, 2018 (in thousands):



		Three Months Ended June 30, 2018					Six Months Ended June 30, 2018
		Post ASC 606 Adoption		ASC 606 Changes		Pre ASC 606 Adoption		Post ASC 606 Adoption		ASC 606 Changes		Pre ASC 606 Adoption
Revenues
Casino	$	31,142	$	14,825	$	45,967	$	61,087	$	28,586	$	89,673	(a) (b) (c) (d)
Food and beverage		17,541		(1,363)		16,178		34,479		(2,816)		31,663	(a) (d) (e)
Hotel		8,097		(1,279)		6,818		14,460		(1,937)		12,523	(a) (f)
Other		3,129		20		3,149		6,151		44		6,195	(a) (d)
Gross revenues		59,909		12,203		72,112		116,177		23,877		140,054
Less promotional allowances		—		(12,374)		(12,374)		—		(24,193)		(24,193)	(a) (d)
Net revenues		59,909		(171)		59,738		116,177		(316)		115,861	(b) (c) (e) (f)
Operating Expenses
Casino		10,856		8,049		18,905		21,552		16,331		37,883	(b) (c) (g)
Food and beverage		13,196		(6,944)		6,252		26,290		(13,867)		12,423	(e) (g)
Hotel		3,056		(760)		2,296		6,555		(1,733)		4,822	(f) (g)
Other		1,565		(516)		1,049		3,110		(1,047)		2,063	(g)
Selling, general and administrative		16,152		—		16,152		31,337		—		31,337
Depreciation and amortization		3,738		—		3,738		7,430		—		7,430
Loss on disposition of assets		4		—		4		4		—		4
Total operating expenses		48,567		(171)		48,396		96,278		(316)		95,962

Net income		9,239		—		9,239		15,980		—		15,980
Basic	$	0.52	$	—	$	0.52	$	0.90	$	—	$	0.90
Diluted	$	0.50	$	—	$	0.50	$	0.86	$	—	$	0.86

(a)

Change as a result of reclassification of current period complimentaries at estimated retail price from promotional allowances to casino, food and beverage, hotel, spa and retail revenues.

(b)

Change as a result of reclassification of the earned and unused points during the period from casino expense to casino revenue.

(c)

Change as a result of reclassification of the wide area progressive system expense from casino revenue to casino expense.

(d)

Change as a result of the change of the casino floor bars menu prices and some retail outlets prices from discounted to retail price.

(e)

Change as a result of reclassification of the banquets service fees from food and beverage expense to food and beverage revenue.

(f)

Change as a result of reclassification of the groups rebate and commissions from hotel expense to hotel revenue.

(g)

Change as a result of the elimination of the reclassification journal entry that reclassified the costs of complimentaries from hotel, food and beverage and other expense categories to casino expense. Under ASC 606, the costs of complimentaries stay in the complimentaries revenue producing department.

Casino revenue: Casino revenues represent the net win from gaming activity, which is the difference between the amounts won and lost, which represents the transaction price. Jackpots, other than the incremental amount of progressive jackpots, are recognized at the time they are won by customers. Funds deposited by customers in advance and outstanding chips and slot tickets in the customers’ possession are recognized as a liability until such amounts are redeemed or used in gaming play by the customer. Additionally, net win is reduced by the performance obligations for the players’ club program as discussed above, progressive jackpots and any pre-arranged marker discounts. Progressive jackpot provisions are recognized in two components: 1) as wagers are made for the share of players’ wagers that are contributed to the progressive jackpot award, and 2) as jackpots are won for the portion of the progressive jackpot award contributed by us. Cash discounts and other cash incentives to guests related to gaming play are recorded as a reduction to gaming revenue.

Food and Beverage, Hotel and Other (retail) Revenues: Food and Beverage, Hotel and Other Revenues in general are recognized when products are delivered or services are performed. We recognize revenue related to the products and services associated to the players points’ redemptions at the time products are delivered or services are performed, with corresponding reduction in the deferred revenue, at SSP. Other complimentaries in conjunction with the gaming and other business are also valued at SSP. Hotel revenue is presented net of non-third party rebate and commission.

Other Revenues: Other revenues (excluding retail) primarily consist of commissions received on ATM transactions and cash advances, which are recorded on a net basis as the Company represents the agent in its relationship with the third-party service providers, and commissions and fees received in connection with pari-mutuel wagering, which are also recorded on a net basis.

Sales and other taxes: Sales taxes and other taxes collected from customers on behalf of governmental authorities are accounted for on a net basis and are not included in revenues or operating expenses. In addition, tips and other gratuities, excluding service charges, collected from customers on behalf of our employees are also accounted for on a net basis and are not included in revenues or operating expenses.