3. Revenue

Changes in Revenue Recognition Policies

The Company adopted the new revenue standard on January 1, 2018. The Company applied the new revenue standard retrospectively and has recast the 2017 condensed consolidated financial statements as though the new revenue standard had been applied in all periods presented. The Company’s franchise agreements offer the following benefits to the franchisee: common use and promotion of RE/MAX trademarks; distinctive sales and promotional materials; access to technology; standardized supplies and other materials used in RE/MAX offices; and recommended procedures for operation of RE/MAX offices. The Company concluded that these benefits are all a part of one performance obligation, a license of symbolic intellectual property.

Franchise sales is comprised of revenue from the sale or renewal of franchises. The Company previously recognized revenue at the time of sale. Under the new revenue standard, the franchise sale initial fees are considered to be a part of the license of symbolic intellectual property, which is now recognized over the contractual term of the franchise agreement, which is typically 5 years for RE/MAX and 7 years for Motto franchise agreements, respectively. Correspondingly, the commissions related to franchise sales are recorded as an asset (the current portion in “Other current assets” and long term portion in “Other assets, net of current portion”) and are recognized over the contractual term of the franchise agreement in “Selling, operating and administrative expenses”.

The following tables summarize the impacts of the new revenue standard adoption on the Company’s condensed consolidated financial statements (in thousands):

Condensed Consolidated Balance Sheet


	Impact of Changes in Accounting Policies
	As of December 31, 2017
	As previously reported		Adjustments		As adjusted
Accounts and notes receivable, current portion, net	$	21,304	$	(1,020)	$	20,284
Income taxes receivable		870		93		963
Other current assets		6,924		1,050		7,974
Deferred tax assets, net		59,151		3,690		62,841
Other assets, net of current portion		1,563		2,460		4,023
Income taxes payable		133		(36)		97
Deferred revenue		18,918		6,350		25,268
Deferred revenue, net of current		-		20,228		20,228
Retained earnings		16,027		(7,627)		8,400
Accumulated other comprehensive income, net of tax		515		(56)		459
Non-controlling interest		(398,348)		(12,586)		(410,934)

Condensed Consolidated Statement of Income


	Impact of Changes in Accounting Policies
	Three Months Ended March 31, 2017
	As previously reported		Adjustments		As adjusted
Franchise sales and other revenue	$	8,794	$	(823)	$	7,971
Selling, operating and administrative expenses		26,794		(140)		26,654
Net income		10,071		(683)		9,388
Net income attributable to non-controlling interest		5,159		(311)		4,848
Net income attributable to RE/MAX Holdings, Inc.		4,912		(372)		4,540
Net income attributable to RE/MAX Holdings, Inc. per share of Class A common stock
Basic		0.28		(0.02)		0.26
Diluted		0.28		(0.02)		0.26

Condensed Consolidated Statement of Comprehensive Income


	Impact of Changes in Accounting Policies
	Three Months Ended March 31, 2017
	As previously reported		Adjustments		As adjusted
Net income	$	10,071	$	(683)	$	9,388
Change in cumulative translation adjustment		95		(6)		89
Comprehensive income		10,166		(689)		9,477
Comprehensive income attributable to non-controlling interest		5,210		(311)		4,899
Comprehensive income attributable to RE/MAX Holdings, Inc., net of tax		4,956		(378)		4,578

Condensed Consolidated Statement of Cash Flows


	Impact on Changes in Accounting Policies
	Three Months Ended March 31, 2017
	As previously reported		Adjustments		As adjusted
Net income	$	10,071	$	(683)	$	9,388
Changes in operating assets and liabilities		(2,368)		683		(1,685)

Revenue Recognition Under the New Revenue Standard

The Company generates all of its revenue from contracts with customers. The following is a description of principal activities from which the Company generates its revenue. The franchise agreements provide the franchisees the right to access intellectual property throughout the license period. The method used to measure progress is over the passage of time for most streams of revenue.

Continuing Franchise Fees

The Company provides an ongoing trademark license, operational, training and administrative services and systems to RE/MAX franchisees, which include systems and tools that are designed to help the Company’s franchisees and their agents serve their customers and help franchisees attract new or retain existing agents. Revenue from continuing franchise fees consists of fixed contractual fees paid monthly by franchise owners and franchisees based on the number of RE/MAX agents in the respective franchised region or office and the number of Motto offices (no significant continuing franchise fees were generated by Motto during the periods presented). This revenue is recognized in the month for which the fee is billed.

Annual Dues

Annual dues revenue represents amounts assessed to agents for membership affiliation in the RE/MAX network. The Company defers the annual dues revenue when billed and recognizes the revenue ratably over the 12-month period to which it relates.

The activity in the Company’s annual dues deferred revenue consists of the following (in thousands):


	Balance at beginning of period		New billings		Revenue recognized(a)		Balance at end of period
Three months ended March 31, 2018	$	15,297	$	10,430	$	(8,696)	$	17,031

(a)Revenue recognized related to the beginning balance was $7.5 million for the three months ended March 31, 2018.

Broker Fees

Revenue from broker fees represents fees received from the Company’s RE/MAX franchised regions or franchise offices that are based on a percentage of RE/MAX agents’ gross commission income. Revenue from broker fees is recognized as revenue in the month when a home sale transaction occurs.

Franchise Sales

The activity in the Company’s deferred revenue is included in “Deferred revenue” and “Deferred revenue, net of current portion” on the Condensed Consolidated Balance Sheets.

The activity in the Company’s franchise sales deferred revenue accounts consists of the following (in thousands):


	Balance at beginning of period		New billings		Revenue recognized(a)		Balance at end of period
Three months ended March 31, 2018	$	27,943	$	2,534	$	(2,344)	$	28,133

(a)Revenue recognized related to the beginning balance was $2.1 million for the three months ended March 31, 2018.

Commissions Related to Franchise Sales

Commissions paid on franchise sales are recognized as an asset and amortized over the contract life of the franchise agreement. The activity in the Company’s capitalized contract costs for commissions (which are included in “other current assets” and “other assets, net of current portion” on the Condensed Consolidated Balance Sheets) consist of the following (in thousands):


			Expense recognized
	Balance at		that is included in		Additions to contract		Balance at end
	beginning of period		beginning balance		cost for new activity		of period
Three months ended March 31, 2018	$	3,532	$	(325)	$	470	$	3,677

Other Revenue

Other revenue is primarily revenue from preferred marketing arrangements, approved supplier programs, and event-based revenue from training and other programs. Revenue from preferred marketing arrangement involves both flat fees paid in advance as well as revenue sharing, both of which are generally recognized over the period of the arrangement. Event-based revenue is recognized when the event occurs and until then is included in “Deferred revenue”. Other revenue also includes revenue contributed by booj for web site design, development, implementation, hosting and maintenance for its external customers.

Disaggregated Revenue

In the following table, revenue is disaggregated by geographical area for each of the three months ended March 31, 2018 and 2017 (in thousands):


	U.S.		Canada		Global and Other		Total
Three months ended March 31, 2018	$	36,749	$	5,763	$	10,130	$	52,642
Three months ended March 31, 2017		34,078		5,224		8,104		47,406

In the following table, revenue is disaggregated by owned or independent regions in the U.S. or Canada for each of the three months ended March 31, 2018 and 2017 (in thousands):


	Owned Regions		Independent Regions		Global and Other		Total
Three months ended March 31, 2018	$	31,363	$	11,149	$	10,130	$	52,642
Three months ended March 31, 2017		28,552		10,750		8,104		47,406

Transaction Price Allocated to the Remaining Performance Obligations

The following table includes estimated revenue by year expected to be recognized in the future related to performance obligations that are unsatisfied (or partially unsatisfied) at the end of the reporting period (in thousands):


	Remaining nine months of 2018		2019		2020		2021		2022		2023		Thereafter		Total
Annual dues	$	16,029	$	1,002	$	-	$	-	$	-	$	-	$	-	$	17,031
Franchise sales		5,898		6,426		5,086		3,653		2,091		952		4,027		28,133
Total	$	21,927	$	7,428	$	5,086	$	3,653	$	2,091	$	952	$	4,027	$	45,164

Using the transition requirements of the new standard, the Company has elected not to disclose the amount of the transaction price allocated to the remaining performance obligations or when the Company expects to recognize that amount as revenue for the year ended December 31, 2017.