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Significant Accounting Policies (Policies)

3 Months Ended

Mar. 31, 2019

Principles of Consolidation: The unaudited Condensed Consolidated Financial Statements include the accounts of Penn National Gaming, Inc. and its subsidiaries. Investments in and advances to unconsolidated affiliates that do not meet the consolidation criteria of the authoritative guidance for voting interest, controlling interest or variable interest entities (“VIEs”), are accounted for under the equity method. All intercompany accounts and transactions have been eliminated in consolidation.

Use of Estimates

Use of Estimates: The preparation of unaudited Condensed Consolidated Financial Statements in conformity with GAAP requires management to make estimates and assumptions that affect (i) the reported amounts of assets and liabilities, (ii) the disclosure of contingent assets and liabilities at the date of the financial statements, and (iii) the reported amounts of revenues and expenses during the reporting period. Actual results may differ from those estimates.

Segment Information

Segment Information: The Company’s Chief Executive Officer, who is the Company’s Chief Operating Decision Maker (“CODM”), as that term is defined in Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 280, “Segment Reporting,” measures and assesses the Company’s business performance based on regional operations of various properties grouped together based primarily on their geographic locations.

We view each of our gaming and racing properties as an operating segment with the exception of our two properties in Jackpot, Nevada, which we view as one operating segment. We view our combined video gaming terminals (“VGT”) operations as an operating segment. See Note 16, “Segment Information,” for further information. For financial reporting purposes, as of March 31, 2019, we aggregate our operating segments into the following reportable segments:



	Location	Real Estate Assets Lease or Ownership Structure
Northeast segment
Ameristar East Chicago	East Chicago, Indiana	Pinnacle Master Lease
Hollywood Casino Bangor	Bangor, Maine	Penn Master Lease
Hollywood Casino at Charles Town Races	Charles Town, West Virginia	Penn Master Lease
Hollywood Casino Columbus	Columbus, Ohio	Penn Master Lease
Hollywood Casino Lawrenceburg	Lawrenceburg, Indiana	Penn Master Lease
Hollywood Casino at Penn National Race Course	Grantville, Pennsylvania	Penn Master Lease
Hollywood Casino Toledo	Toledo, Ohio	Penn Master Lease
Hollywood Gaming at Dayton Raceway	Dayton, Ohio	Penn Master Lease
Hollywood Gaming at Mahoning Valley Race Course	Youngstown, Ohio	Penn Master Lease
Meadows Racetrack and Casino	Washington, Pennsylvania	Meadows Lease
Plainridge Park Casino	Plainville, Massachusetts	Pinnacle Master Lease

South segment
1^st Jackpot Casino	Tunica, Mississippi	Penn Master Lease
Ameristar Vicksburg	Vicksburg, Mississippi	Pinnacle Master Lease
Boomtown Biloxi	Biloxi, Mississippi	Penn Master Lease
Boomtown Bossier City	Bossier City, Louisiana	Pinnacle Master Lease
Boomtown New Orleans	New Orleans, Louisiana	Pinnacle Master Lease
Hollywood Casino Gulf Coast	Bay St. Louis, Mississippi	Penn Master Lease
Hollywood Casino Tunica	Tunica, Mississippi	Penn Master Lease
L’Auberge Baton Rouge	Baton Rouge, Louisiana	Pinnacle Master Lease
L’Auberge Lake Charles	Lake Charles, Louisiana	Pinnacle Master Lease
Margaritaville Resort Casino ⁽¹⁾	Bossier City, Louisiana	Margaritaville Lease
Resorts Casino Tunica⁽²⁾	Tunica, Mississippi	Penn Master Lease

West segment
Ameristar Black Hawk	Black Hawk, Colorado	Pinnacle Master Lease
Cactus Petes and Horseshu	Jackpot, Nevada	Pinnacle Master Lease
M Resort	Henderson, Nevada	Penn Master Lease
Tropicana Las Vegas	Las Vegas, Nevada	Owned
Zia Park Casino	Hobbs, New Mexico	Penn Master Lease

Midwest segment
Ameristar Council Bluffs	Council Bluffs, Iowa	Pinnacle Master Lease
Argosy Casino Alton ⁽³⁾	Alton, Illinois	Penn Master Lease
Argosy Casino Riverside	Riverside, Missouri	Penn Master Lease
Hollywood Casino Aurora	Aurora, Illinois	Penn Master Lease
Hollywood Casino Joliet	Joliet, Illinois	Penn Master Lease
Hollywood Casino at Kansas Speedway ⁽⁴⁾	Kansas City, Kansas	Owned - JV
Hollywood Casino St. Louis	Maryland Heights, Missouri	Penn Master Lease
Prairie State Gaming⁽⁵⁾	Illinois	N/A
River City Casino	St. Louis, Missouri	Pinnacle Master Lease


(1)	Acquired on January 1, 2019.


(2)	In April 2019, the Company announced that it expects to close Resorts Casino Tunica on June 30, 2019.


(3)	The riverboat is owned by us and not subject to the Penn Master Lease.


(4)	Pursuant to a joint venture with International Speedway Corporation (“International Speedway”) and includes the Company’s 50% investment in Kansas Entertainment, LLC (“Kansas Entertainment”), which owns the Hollywood Casino at Kansas Speedway.

(5)

VGT route operations

Revenue Recognition

Revenue Disaggregation We generate revenues at our owned, managed, or operated properties principally by providing the following types of services: (i) gaming, (ii) food and beverage, (iii) hotel, (iv) racing, (v) reimbursable management costs and (vi) other. In addition, we assess our revenues based on geographic location of the related properties, which is consistent with our reportable segmentsRevenue Recognition: The Company’s revenue from contracts with customers consists of gaming wagers, food and beverage transactions, retail transactions, hotel room sales, racing wagers, sports betting wagers, and management services

related to the management of external casinos and reimbursable costs associated with management contracts. During the second quarter of 2018, our management contract was terminated for Hollywood Casino-Jamul San Diego, which is located on the Jamul Tribe’s trust land in San Diego, California. In addition, our management contract was terminated for Casino Rama, which is located in Ontario, Canada, during the third quarter of 2018.

Complimentaries associated with Gaming Contracts

Food and beverage, hotel, and other services furnished to patrons for free as an inducement to gamble or through the redemption of our customers’ loyalty points are recorded as food and beverage, hotel, and other revenues, at their estimated standalone selling prices with an offset recorded as a reduction to gaming revenues. The cost of providing complimentary goods and services to patrons as an inducement to gamble as well as for the fulfillment of our loyalty point obligation is included in food, beverage, hotel, and other expenses.Customer-related Liabilities

The Company has two general types of liabilities related to contracts with customers: (i) our loyalty credit obligation and (ii) advance payments on goods and services yet to be provided and for unpaid wagers. The Company’s loyalty reward programs allow members to utilize their reward membership cards to earn loyalty credits that are redeemable for slot play and complimentaries, such as food and beverage at our restaurants, lodging at our hotels and products offered at our retail stores across the vast majority of the Company’s properties. The Company accounts for the loyalty credit obligation utilizing a deferred revenue model, which defers revenue at the point in time when the loyalty credits are earned by our customers. Deferred revenue associated with the loyalty credit obligation is recognized at the point when the loyalty points are redeemed by our customers. The liability associated with the loyalty credit obligation is based on the estimated standalone selling price of the loyalty credits earned after factoring in the likelihood of redemption.

The Company’s loyalty credit obligation, which is included in “Accrued expenses and other current liabilities” within our unaudited Condensed Consolidated Balance Sheets, was $44.6 million and $39.9 million as of March 31, 2019 and December 31, 2018, respectively. Our loyalty credit obligations are generally settled within six months of issuance. Changes between the opening and closing balances primarily relate to the timing of our customers’ election to redeem loyalty credits.

The Company’s advance payments on goods and services yet to be provided and for unpaid wagers primarily consist of the following: (i) deposits on rooms and convention space, (ii) money deposited on behalf of a customer in advance of their property visit (referred to as “safekeeping” or “front money”), (iii) outstanding tickets generated by slot machine play or pari-mutuel wagering, (iv) outstanding chip liabilities, (v) unclaimed jackpots, and (vi) gift cards redeemable at our properties. Advance payments on goods and services are recognized as revenue when the good or service is transferred to the customer. Unpaid wagers primarily relate to the Company’s obligation to settle outstanding slot tickets, pari-mutuel racing tickets and gaming chips with customers and generally represent obligations stemming from prior wagering events, of which revenue was previously recognized. The Company’s advance payments on goods and services yet to be provided and for unpaid wagers were $31.5 million and $34.3 million as of March 31, 2019 and December 31, 2018, respectively, of which, $0.5 million and $0.7 million are classified as long-term, respectively. The current portion and long-term portion of our advance payments on goods and services yet to be provided and for unpaid wagers are included in “Accrued expenses and other current liabilities”

Gaming and Racing Taxes

Gaming and Racing Taxes: The Company is subject to gaming and pari-mutuel taxes based on gross gaming revenue and pari-mutuel revenue in the jurisdictions in which it operates. The Company primarily recognizes gaming and pari-mutuel tax expense based on the statutorily required percentage of revenue that is required to be paid to state and local jurisdictions in the states where or in which wagering occurs. In certain states in which the Company operates, gaming taxes are based on graduated rates. The Company records gaming tax expense at the Company’s estimated effective gaming tax rate for the year, considering estimated taxable gaming revenue and the applicable rates. Such estimates are adjusted each interim period. If gaming tax rates change during the year, such changes are applied prospectively in the determination of gaming tax expense in future interim periods. For the three months ended March 31, 2019 and 2018, these expenses, which were recorded primarily within gaming expense within the unaudited Condensed Consolidated Statements of Operations, were $386.5 million and $247.4 million, respectively.

Earnings Per Share

Earnings Per Share: Basic earnings per share (“EPS”) is computed by dividing net income applicable to common stock by the weighted-average number of common shares outstanding during the period. Diluted EPS reflects the additional dilution for all potentially-dilutive securities, such as stock options and unvested restricted shares. See Note 14, “Earnings per Share,” for further information.

Stock-Based Compensation

Stock-Based Compensation: The Company accounts for stock compensation under ASC Topic 718, “Compensation-Stock Compensation,” which requires the Company to expense the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award. This expense is recognized ratably over the requisite service period following the date of grant. The Company accounts for forfeitures in the period in which they occur based on actual amounts. See Note 13, “Stock-based Compensation,” for further information.

Application of Business Combination Accounting

Application of Business Combination Accounting: The Company utilizes the acquisition method of accounting in accordance with ASC Topic 805, “Business Combinations,” which requires us to allocate the purchase price to tangible and identifiable intangible assets based on their fair values. The excess of the purchase price over the fair value of the net assets acquired is recorded as goodwill. If the fair value ascribed to tangible and identifiable intangible assets changes during the measurement period (due to additional information being available and related Company analysis), the measurement period adjustment is recognized in the reporting period in which the adjustment amount is determined and offset against goodwill. The measurement period for our acquisitions are no more than one year in duration.

New Accounting Pronouncements

Accounting Pronouncements Implemented in 2019

On January 1, 2019, the Company adopted the new lease standard ASC Topic 842, “Leases” (“ASC 842”), and all the related amendments (the “new lease standard”) using the modified retrospective method with an effective date of January 1, 2019 (the “adoption date”) and a cumulative effect adjustment to equity. The comparative information has not been restated and continues to be reported under the accounting standards in effect for those periods. As part of the adoption, the Company elected to utilize the package of practical expedients included in this guidance, which permitted the Company to not reassess (i) whether any expired or existing contracts contain leases; (ii) the lease classification for any expired or existing leases; and (iii) the initial direct costs for existing leases. In conjunction with the adoption of the new lease standard, the Company adopted the following policies: (i) an election to account for lease and non-lease components as a single component for all classes of underlying assets; and (ii) an election not to recognize short-term leases (i.e., a lease that is less than 12 months and contains no purchase option) within the unaudited Condensed Consolidated Balance Sheets, with the expense related to these short-term leases recorded within total operating expenses within the unaudited Condensed Consolidated Statements of Operations.

Penn Master Lease and Pinnacle Master Lease

The most significant impact of the adoption of the new lease standard relates to the accounting for our Master Leases with GLPI. Under previous GAAP, as contained within ASC Topic 840, “Leases,” the Company concluded that (i) the Penn Master Lease and (ii) the Pinnacle Master Lease to each be a failed sale-leaseback transaction resulting in (a) the land and building assets associated with the Master Leases to be recognized in “Property and equipment, net” within the unaudited Condensed Consolidated Balance Sheets; (b) the recognition of a financing obligation, with the associated interest recorded to “Interest expense” within the unaudited Condensed Consolidated Statements of Operations; and (c) the contingent rentals to be recorded as additional interest expense. Under the provisions of the new lease standard, the Company was required to evaluate its existing sale-leaseback transactions with GLPI to determine whether a sale had occurred, and if a sale had occurred, to determine the classification (operating or finance) of each component contained within each of the Master Leases.

Leasing components contained within each of the Master Leases that were determined to be operating leases (consisting primarily of the land components) at the adoption date resulted in (i) the derecognition of the existing financing obligation and the carrying amount of the property and equipment with an adjustment to the opening balance of retained earnings; and (ii) the recognition of an operating lease liability and an operating lease right-of-use (“ROU”) asset. Operating lease expenses are recorded as rent expense, as opposed to interest expense and depreciation and amortization expense, within the unaudited Condensed Consolidated Statements of Operations and recorded as operating cash outflows within the unaudited Condensed Consolidated Statements of Cash Flows.

Leasing components contained within each of the Master Leases that were determined to continue to be financing obligations (consisting primarily of the building components) at the adoption date resulted in (i) the continued recognition of the leased assets in “Property and equipment, net” within our unaudited Condensed Consolidated Balance Sheets and (ii) the continued recognition of the financing obligation utilizing assumptions as determined (a) at the lease commencement date with respect to the Penn Master Lease and (b) at the acquisition date with respect to the Pinnacle Master Lease.

Our Hollywood Casino at Dayton Raceway and Hollywood Casino at Mahoning Valley Race Course (“Dayton and Mahoning Valley”) properties included within the Penn Master Lease were previously accounted for under build-to-suit guidance under previous GAAP. The Company was required to evaluate the components contained within the build-to-suit arrangements and determine the classification (operating or finance) under the provisions of the new lease standard at the adoption date. The Dayton and Mahoning Valley lease components were determined to be finance leases, which resulted in (i) the recognition of a finance lease ROU asset (recorded to depreciation and amortization expense over the lease term); (ii) a corresponding finance lease liability (recorded to interest expense over the lease term); and (iii) a write-off of the previous (a) carrying amount of the property and equipment and (b) financing obligation recorded with an adjustment to equity at the adoption date. Principal payments associated with finance leases are recorded as financing cash outflows and interest payments associated with finance leases are recorded as operating cash outflows within our unaudited Condensed Consolidated Statements of Cash Flows.

Operating Leases, inclusive of the Meadows Lease with GLPI

The adoption of the new lease standard required us to recognize ROU assets and lease liabilities that had not previously been recorded within the unaudited Condensed Consolidated Balance Sheets. The lease liability for operating leases is based on the net present value of future lease payments. The ROU asset for operating leases is based on the lease liability adjusted for the reclassification of certain balance sheet amounts, such as deferred rent. Deferred and prepaid rent are no longer presented

separately. Leases that are short-term in nature are not recognized as ROU assets within the unaudited Condensed Consolidated Balance Sheets and are recognized as an expense (recorded within total operating expenses) within the unaudited Condensed Consolidated Statements of Operations.

The impact of the adoption of the new lease standard on our unaudited Condensed Consolidated Balance Sheets at January 1, 2019 was as follows (only financial statement line items impacted are presented):



				Impacts of:
(in thousands)	As Reported as of December 31, 2018			Financing Obligations - Master Leases ⁽¹⁾		Finance Leases - Dayton and Mahoning Valley			Operating Leases - Master Leases⁽²⁾			Operating Lease - Meadows ⁽³⁾		Other Operating Leases - Non-Master Leases			As Adjusted for ASC 842		Increase/(Decrease)
Assets
Current assets
Prepaid expenses	$	62,971		$	—	$	—		$	—		$	—	$	(977	)	$	61,994	$	(977	)
Total current assets	$	677,658		$	—	$	—		$	—		$	—	$	(977	)	$	676,681	$	(977	)
Property and equipment, net ⁽⁴⁾	$	6,868,768		$	—	$	(164,314	)	$	(1,407,357	)	$	—	$	—		$	5,297,097	$	(1,571,671	)
Other assets
Goodwill	$	1,228,422		$	5,517	$	—		$	—		$	—	$	—		$	1,233,939	$	5,517
Operating lease right-of-use assets ⁽⁵⁾	$	—		$	—	$	—		$	3,541,144		$	112,804	$	152,519		$	3,806,467	$	3,806,467
Finance lease right-of-use assets ⁽⁶⁾	$	—		$	—	$	224,482		$	—		$	—	$	—		$	224,482	$	224,482
Total other assets	$	3,414,586		$	5,517	$	224,482		$	3,541,144		$	112,804	$	152,519		$	7,451,052	$	4,036,466
Total assets	$	10,961,012		$	5,517	$	60,168		$	2,133,787		$	112,804	$	151,542		$	13,424,830	$	2,463,818

Liabilities
Current liabilities
Current portion of financing obligations ⁽⁷⁾	$	67,777		$	—	$	(1,534	)	$	(16,157	)	$	—	$	—		$	50,086	$	(17,691	)
Current portion of operating lease liabilities ⁽⁵⁾	$	—		$	—	$	—		$	72,894		$	20,515	$	8,913		$	102,322	$	102,322
Current portion of finance lease liabilities ⁽⁶⁾	$	—		$	—	$	5,752		$	—		$	—	$	—		$	5,752	$	5,752
Accrued expenses and other current liabilities	$	577,968		$	—	$	—		$	—		$	—	$	(434	)	$	577,534	$	(434	)
Total current liabilities	$	738,436		$	—	$	4,218		$	56,737		$	20,515	$	8,479		$	828,385	$	89,949
Long-term portion of financing obligations ⁽⁷⁾	$	7,080,638		$	5,517	$	(181,262	)	$	(2,760,587	)	$	—	$	—		$	4,144,306	$	(2,936,332	)
Long-term portion of operating lease liabilities ⁽⁵⁾	$	—		$	—	$	—		$	3,467,057		$	92,289	$	144,988		$	3,704,334	$	3,704,334
Long-term portion of finance lease liabilities ⁽⁶⁾	$	—		$	—	$	218,329		$	—		$	—	$	—		$	218,329	$	218,329
Deferred income taxes ⁽⁸⁾	$	—		$	—	$	4,288		$	299,523		$	—	$	—		$	303,811	$	303,811
Other noncurrent liabilities	$	28,269		$	—	$	—		$	—		$	—	$	(1,925	)	$	26,344	$	(1,925	)
Total liabilities	$	10,229,791		$	5,517	$	45,573		$	1,062,730		$	112,804	$	151,542		$	11,607,957	$	1,378,166
Stockholders’ equity
Retained earnings (accumulated deficit)	$	(967,949	)	$	—	$	14,595		$	1,071,057		$	—	$	—		$	117,703	$	1,085,652
Total Penn National Gaming, Inc. stockholders’ equity	$	731,226		$	—	$	14,595		$	1,071,057		$	—	$	—		$	1,816,878	$	1,085,652
Total stockholders’ equity	$	731,221		$	—	$	14,595		$	1,071,057		$	—	$	—		$	1,816,873	$	1,085,652
Total liabilities and stockholders’ equity	$	10,961,012		$	5,517	$	60,168		$	2,133,787		$	112,804	$	151,542		$	13,424,830	$	2,463,818


(1)	During the first quarter of 2019, the Company identified an adjustment to the purchase price allocation associated with its October 2018 acquisition of Pinnacle Entertainment, Inc. (“Pinnacle”). The purchase price adjustment increased the financing obligation upon the adoption of the new lease standard, resulting in an increase to goodwill (see Note 5, “Acquisitions”).


(2)	Represents components contained within each of the Master Leases determined to be operating leases (primarily consists of land components).


(3)	Represents the triple net lease with GLPI for the real estate assets used in the operations of Meadows Racetrack and Casino (the “Meadows Lease”).

(4)

Represents the (i) derecognition of the carrying amount of the property and equipment, net, associated with land components contained within our Master Leases determined to be operating leases upon the adoption of the new lease standard; and (ii) derecognition of the carrying amount of the property and equipment, net, associated with land and building components associated with Dayton and Mahoning Valley determined to be finance leases upon the adoption of the new lease standard.

(5)

Operating lease ROU assets represent (i) the land components contained within the Master Leases determined to be operating leases upon the adoption of the new lease standard; and (ii) with respect to other Operating Leases, represent (a) the Meadows Lease, which was acquired by the Company in conjunction with in the acquisition of Pinnacle; (b) ground and levee leases with landlords, which were not assumed by GLPI and remain an obligation of the Company; and (c) buildings and equipment not associated with our Master Leases. For leases where the rate implicit in the lease was not readily determinable, we used our incremental borrowing rate based on the information available at the commencement date in determining the present value of lease payments. We utilized the incremental borrowing rate on the adoption date for operating leases that commenced prior to that date. The operating lease liability is based on the net present value of future lease payments.

(6)

Amounts primarily represent finance leases associated with Dayton and Mahoning Valley (which are included in the Penn Master Lease) that under previous GAAP utilized specific build-to-suit guidance. The adoption of the new lease standard required the Company to evaluate the components under current guidance contained within the new lease standard, which resulted in all components being classified as finance leases. Finance leases result in (i) the recognition of a finance lease ROU asset amortized over the lease term and (ii) a corresponding finance lease liability (recorded to

interest expense over the lease term). We utilized our incremental borrowing rate based on the information available at the adoption date in determining the present value of lease payments. The finance lease liability is based on the net present value of future lease payments.


(7)	Represents components associated with our Master Leases that remain financing obligations (primarily building components). The financing obligation at the adoption date was calculated utilizing previous assumptions as determined (a) at the lease commencement date with respect to the Penn Master Lease and (b) at the acquisition date with respect to the Pinnacle Master Lease.


(8)	Represents the tax impacts related to the adoption of the new lease standard.

In June 2018, the FASB issued ASU No. 2018-07, “Compensation - Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting.” These amendments expand the scope of ASC Topic 718, “Compensation - Stock Compensation” (which previously only included share-based payments to employees), to include share-based payments issued to nonemployees for goods or services. Consequently, the accounting for share-based payments to nonemployees and employees is substantially aligned. This new standard superseded Subtopic 505-50, “Equity - Equity-Based Payments to Non-Employees.” The Company adopted this guidance during the first quarter of 2019 and it did not have a material impact on our unaudited Condensed Consolidated Financial Statements.