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 adoption of the new guidance changed the timing of recognition of franchise sales and franchise renewal revenue and related commissions paid on franchise sales and renewals, as discussed below. These changes resulted in net cumulative adjustments to “Retained earnings” of $4.9 million and “Non-controlling interest” of $11.6 million which were recorded to the opening balance sheet as of January 1, 2016.

The Company’s franchise agreements offer the following benefits to the franchisee: common use and promotion of RE/MAX and Motto trademarks; distinctive sales and promotional materials; access to technology; standardized supplies and other materials used in RE/MAX and Motto offices; and recommended procedures for operation of RE/MAX and Motto offices. The Company concluded that these benefits are all a part of one performance obligation, a license of symbolic intellectual property that is billed through a variety of fees including franchise sales, continuing franchise fees, broker fees, and annual dues, described below. The Company has other performance obligations associated with contracts with customers in other revenue for training, marketing and events.

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. 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”. Previously, such commissions were expensed as incurred.

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

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 September 30, 2017
	As previously reported		Adjustments		As adjusted
Franchise sales and other revenue	$	5,611	$	(306)	$	5,305
Selling, operating and administrative expenses		31,832		11		31,843
Provision for income taxes		3,091		(70)		3,021
Net income		7,537		(247)		7,290
Net income attributable to non-controlling interest		3,702		(129)		3,573
Net income attributable to RE/MAX Holdings, Inc.		3,835		(118)		3,717
Net income attributable to RE/MAX Holdings, Inc. per share of Class A common stock:
Basic		0.22		(0.01)		0.21
Diluted		0.22		(0.01)		0.21


	Impact of Changes in Accounting Policies
	Nine Months Ended September 30, 2017
	As previously reported		Adjustments		As adjusted
Franchise sales and other revenue	$	19,065	$	(1,221)	$	17,844
Selling, operating and administrative expenses		79,263		(96)		79,167
Provision for income taxes		10,883		(97)		10,786
Net income		33,245		(1,028)		32,217
Net income attributable to non-controlling interest		16,968		(466)		16,502
Net income attributable to RE/MAX Holdings, Inc.		16,277		(562)		15,715
Net income attributable to RE/MAX Holdings, Inc. per share of Class A common stock:
Basic		0.92		(0.03)		0.89
Diluted		0.92		(0.03)		0.89

Condensed Consolidated Statement of Comprehensive Income


	Impact of Changes in Accounting Policies
	Three Months Ended September 30, 2017
	As previously reported		Adjustments		As adjusted
Net income	$	7,537	$	(247)	$	7,290
Change in cumulative translation adjustment		536		(29)		507
Comprehensive income		8,073		(276)		7,797
Comprehensive income attributable to non-controlling interest		3,987		(128)		3,859
Comprehensive income attributable to RE/MAX Holdings, Inc., net of tax		4,086		(148)		3,938


	Impact of Changes in Accounting Policies
	Nine Months Ended September 30, 2017
	As previously reported		Adjustments		As adjusted
Net income	$	33,245	$	(1,028)	$	32,217
Change in cumulative translation adjustment		999		(52)		947
Comprehensive income		34,244		(1,080)		33,164
Comprehensive income attributable to non-controlling interest		17,500		(465)		17,035
Comprehensive income attributable to RE/MAX Holdings, Inc., net of tax		16,744		(615)		16,129

Condensed Consolidated Statement of Cash Flows


	Impact of Changes in Accounting Policies
	Nine Months Ended September 30, 2017
	As previously reported		Adjustments		As adjusted
Net income	$	33,245	$	(1,028)	$	32,217
Deferred income tax expense		3,919		(97)		3,822
Changes in operating assets and liabilities		(100)		1,125		1,025

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

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. This revenue is recognized in the month for which the fee is billed. This revenue is a usage-based royalty as it is dependent on the number of RE/MAX agents and number of Motto offices.

Annual Dues

Annual dues revenue consists of fixed contractual fees paid annually based on the number of RE/MAX agents. The Company defers the annual dues revenue when billed and recognizes the revenue ratably over the 12-month period to which it relates. Annual dues revenue is a usage-based royalty as it is dependent on the number of agents.

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 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
Nine months ended September 30, 2018	$	15,297	$	28,249	$	(26,775)	$	16,771

(a)Revenue recognized related to the beginning balance was $2.4 million and $13.4 million for the three and nine months ended September 30, 2018, respectively.

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 a sales-based royalty and recognized in the month when a home sale transaction occurs. Motto franchisees do not pay any fees based on the number or dollar value of loans brokered.

Franchise Sales

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
Nine months ended September 30, 2018	$	27,943	$	6,083	$	(6,896)	$	27,130

(a)Revenue recognized related to the beginning balance was $1.9 million and $5.7 million for the three and nine months ended September 30, 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):


	Balance at				Additions to contract		Balance at end
	beginning of period		Expense recognized		cost for new activity		of period
Nine months ended September 30, 2018	$	3,532	$	(956)	$	1,146	$	3,722

Other Revenue

Other revenue is primarily revenue from preferred marketing arrangements and event-based revenue from training and other programs. Revenue from preferred marketing arrangements 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 from booj’s operations for its external customers.

Disaggregated Revenue

In the following table, segment revenue is disaggregated by geographical area for the three and nine months ended September 30, 2018 and 2017 (in thousands):


	Three Months Ended September 30,				Nine Months Ended September 30,
			2017				2017
	2018		As adjusted*		2018		As adjusted*
U.S.	$	40,872	$	36,615	$	118,794	$	109,054
Canada		6,170		6,599		18,146		17,573
Global and Other		5,408		5,694		19,214		18,332
Total RE/MAX Franchising		52,450		48,908		156,154		144,959
Other		2,416		163		5,631		245
Total	$	54,866	$	49,071	$	161,785	$	145,204

*See above within Note 3, Revenue for more information

In the following table, segment revenue is disaggregated by owned or independent regions in the U.S. and Canada for the three and nine months ended September 30, 2018 and 2017 (in thousands):


	Three Months Ended September 30,				Nine Months Ended September 30,
			2017				2017
	2018		As adjusted*		2018		As adjusted*
Owned Regions	$	35,138	$	31,616	$	102,193	$	93,165
Independent Regions		11,904		11,598		34,747		33,462
Global and Other		5,408		5,694		19,214		18,332
Total RE/MAX Franchising		52,450		48,908		156,154		144,959
Other		2,416		163		5,631		245
Total	$	54,866	$	49,071	$	161,785	$	145,204

*See above within Note 3, Revenue for more information

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 3 months of 2018		2019		2020		2021		2022		2023		Thereafter		Total
Annual dues	$	7,376	$	9,395	$	—	$	—	$	—	$	—	$	—	$	16,771
Franchise sales		1,916		6,970		5,662		4,246		2,710		1,284		4,342		27,130
Total	$	9,292	$	16,365	$	5,662	$	4,246	$	2,710	$	1,284	$	4,342	$	43,901

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.