| New Accounting Pronouncements | 13. New Accounting Pronouncements
Recently Adopted Accounting Standards
Accounting Standards Update 2014-09, Revenue from
Contracts with Customers (Topic 606)
In May 2014, the Financial Accounting Standards Board
(“FASB”) issued Accounting Standards
Update 2014-09, Revenue from Contracts with Customers
(Topic 606)
The Company recognized the cumulative effect of initially applying
ASC 606 as an adjustment to the opening balance of retained
deficit. The comparative information has not been restated and
continues to be reported under the accounting standards in effect
for those periods.
The Company has determined that the store opening fees received
from international franchisees do not relate to separate and
distinct performance obligations from the franchise right and those
upfront fees will therefore be recognized as revenue over the term
of each respective franchise store agreement, which is typically 10
years. In the past, the Company recognized such fees as revenue
when the related store opened. An adjustment to beginning retained
deficit and a corresponding contract liability of approximately
$15.0 million (of which $2.4 million was current and $12.6
million was long-term) was established on the date of adoption
associated with the fees received through December 31, 2017
that would have been deferred and recognized over the term of each
respective franchise store agreement if the new guidance had been
applied in the past. A deferred tax asset of $3.5 million related
to this contract liability was also established on the date of
adoption.
The Company has also determined that ASC 606 requires a gross
presentation on the consolidated statement of income for franchisee
contributions received by and related expenses of DNAF, the
Company’s consolidated not-for-profit subsidiary.
DNAF exists solely for the purpose of promoting the Domino’s
Pizza brand in the U.S. Under prior accounting guidance, the
Company had presented the restricted assets and liabilities of DNAF
in its consolidated balance sheets and had determined that it acted
as an agent for accounting purposes with regard to franchisee
contributions and disbursements. As a result, the Company
historically presented the activities of DNAF net in its statements
of income and statements of cash flows.
Under the requirements of ASC 606, the Company determined that
there are not performance obligations associated with the franchise
advertising contributions received by DNAF that are separate from
the Company’s domestic royalty payment stream and as a
result, these franchise contributions and the related expenses are
presented gross in the Company’s consolidated statement of
income and consolidated statement of cash flows. While this change
materially impacted the gross amount of reported franchise revenues
and expenses, the impact is generally expected to be an offsetting
increase to both revenues and expenses such that the impact on
income from operations and net income is not expected to be
material. An adjustment to beginning retained deficit and
advertising fund liabilities of approximately $6.4 million related
to the timing of advertising expense recognition was recorded on
the date of adoption. A deferred tax liability (which is reflected
net against deferred tax assets in the consolidated balance sheet)
of approximately $1.6 million related to this adjustment was also
established on the date of adoption.
The cumulative effect of the changes made to the Company’s
consolidated balance sheet as of January 1, 2018 for the
adoption of ASC 606 were as follows (in thousands):
Balance at Adjustments Balance at
Assets
Other assets:
Deferred income taxes $ 2,750 $ 1,878 $ 4,628
Liabilities and stockholders’ deficit
Current liabilities:
Advertising fund liabilities 120,223 (6,425 ) 113,798
Other accrued liabilities 58,578 2,365 60,943
Long-term liabilities:
Other accrued liabilities 21,751 12,639 34,390
Stockholders’ deficit:
Retained deficit (2,739,437 ) (6,701 ) (2,746,138 )
In accordance with the new revenue standard requirements, the
impact of adoption on the Company’s condensed consolidated
statement of income for the second quarter and two fiscal quarters
of 2018 and condensed consolidated balance sheet as of June
17, 2018 was as follows (in thousands):
Fiscal Quarter Ended June 17,
2018
As Reported Balances Effect of (Lower)
Revenues:
Domestic franchise royalties and fees $ 87,418 $ 91,216 $ (3,798 )
International franchise royalties and fees 51,337 51,333 4
Domestic franchise advertising 80,929
— 80,929
General and administrative 86,506 90,327 (3,821 )
Domestic franchise advertising 80,929
— 80,929
Income from operations 126,145 126,118 27
Income before provision for income taxes 91,197 91,170 27
Provision for income taxes 13,789 13,783 6
Net income 77,408 77,387 21
Two Fiscal Quarters Ended
June 17, 2018
As Reported Balances Effect of (Lower)
Revenues:
Domestic franchise royalties and fees $ 176,908 $ 185,284 $ (8,376 )
International franchise royalties and fees 103,758 103,716 42
Domestic franchise advertising 163,140
— 163,140
General and administrative 170,684 179,093 (8,409 )
Domestic franchise advertising 163,140
— 163,140
Income from operations 259,621 259,546 75
Income before provision for income taxes 194,867 194,792 75
Provision for income taxes 28,632 28,615 17
Net income 166,235 166,177 58
June 17, 2018
As Reported Balances Effect of
Assets
Other assets:
Deferred income taxes $ 3,158 $ 1,297 $ 1,861
Liabilities and stockholders’ deficit
Current liabilities:
Advertising fund liabilities 117,360 123,818 (6,458 )
Other accrued liabilities 100,185 97,760 2,425
Long-term liabilities:
Other accrued liabilities 36,181 23,644 12,537
Stockholders’ deficit:
Retained deficit (2,926,921 ) (2,920,278 ) (6,643 )
ASU 2016-04, Liabilities – Extinguishment of Liabilities
(Subtopic 405-20)
In March 2016, the FASB issued
ASU 2016-04, Liabilities – Extinguishment of
Liabilities (Subtopic 405-20): Recognition of Breakage
for Certain Prepaid Stored-Value
Products
ASU 2016-18, Statement of Cash Flows (Topic
230)
In November 2016, the FASB issued
ASU 2016-18, Statement of Cash Flows (Topic 230):
Restricted
Cash
ASU 2018-02, Income Statement – Reporting Comprehensive
Income (Topic 220)
In February 2018, the FASB issued ASU 2018-02, Income
Statement – Reporting Comprehensive Income (Topic 220):
Reclassification of Certain Tax Effects from Accumulated Other
Comprehensive Income
Accounting Standards Not Yet Adopted
The Company has considered all new accounting pronouncements issued
by the FASB and concluded the following accounting pronouncements
may have a material impact on its consolidated financial
statements, or represent accounting pronouncements for which the
Company has not yet completed its assessment.
ASU 2016-02, Leases (Topic 842)
In February 2016, the FASB issued ASU 2016-02, Leases
(Topic 842)
ASU 2016-13, Measurement of Credit Losses on Financial
Instruments (Topic 326)
In June 2016, the FASB issued ASU 2016-13, Measurement
of Credit Losses on Financial Instruments (Topic 326): Measurement
of Credit Losses on Financial
Instruments
ASU 2017-04, Intangibles – Goodwill and Other (Topic
350)
In January 2017, the FASB issued ASU 2017-04 , Intangibles
– Goodwill and Other (Topic 350): Simplifying the Test for
Goodwill
Impairment |
