Recent Accounting Pronouncements
|12 Months Ended
Dec. 31, 2017
|New Accounting Pronouncements and Changes in Accounting Principles [Abstract]
|Recent Accounting Pronouncements
Recent Accounting Pronouncements
Revenue from Contracts with Customers
In May 2014, the FASB issued Update 2014-09, Revenue from Contracts with Customers (“Topic 606”), subsequently amended by various standard updates. This guidance requires an entity to recognize revenue when it transfers 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 or services. Additionally, this guidance expands related disclosure requirements. The Company will adopt Topic 606 in our first quarter of 2018 and apply the guidance retrospectively to all prior periods presented. Revenue recognition related to our restaurant revenue and other revenue, such as gift card breakage, will remain unchanged. Topic 606 will impact the accounting treatment of the Company’s advertising contribution funds, and the Company’s financial statements, as outlined below.
Under Red Robin franchise agreements, the Company and its franchisees are required to contribute a certain percentage of revenues to two national media advertising funds. The Company’s national advertising services are provided on a system-wide basis and, therefore, not considered distinct performance obligations with individual franchisees. The Company currently records the advertising contributions from franchisees as a reduction to advertising expense under Selling, general, and administrative expenses. Upon adoption of Topic 606, the Company will recognize these sales-based advertising contributions from franchisees as Franchise royalties and fees when the underlying franchisee sales occur. The Company will record the related advertising expenses as incurred under Selling, general, and administrative expenses. When an advertising fund is over-spent at year end, advertising expenses will be reported on the consolidated statement of operations in an amount that is greater than the revenue recorded for advertising contributions. Conversely, when an advertising fund is under-spent at year end, the Company will accrue advertising costs up to advertising contributions recorded in revenue. Adoption of Topic 606 is not expected to impact the Company’s income taxes.
Adoption of the new revenue recognition standard is expected to impact our consolidated statements of operations as follows (in thousands):
(1) Effective in our 2018 consolidated statements of operations, Franchise royalties and fees will be renamed as Franchise revenue to capture all types of franchise related revenues earned by the Company.
The new revenue recognition standard is not expected to impact our consolidated balance sheets or consolidated statements of cash flows.
In February 2016, the Financial Accounting Standards Board (“FASB”) issued Update 2016-02, Leases (“Topic 842”). This guidance requires the recognition of liabilities for lease obligations and corresponding right-of-use assets on the balance sheet and disclosure of key information about leasing arrangements. This guidance is effective for annual and interim reporting periods beginning after December 15, 2018 using a modified retrospective adoption method. Early adoption is permitted. The Company will adopt this guidance beginning with its fiscal first quarter 2019. The Company selected and began implementing a new lease management system during 2017. Once the transition to the new system is completed in 2018, this software will enable us to quantify the full impact Topic 842 will have on our consolidated financial statements. We expect adoption of Topic 842 will result in a significant increase in the assets and liabilities on our consolidated balance sheets.