Prior to the adoption of Accounting Standards Update No. 2016-13, Topic 326, Financial Instruments-Credit Losses (“CECL”), the Company recorded incurred loss reserves against receivable balances based on current and historical information, with delinquency status being the primary indicator of a deterioration in credit quality. The recently adopted CECL reserve methodology requires companies to measure expected credit losses on financial instruments based on the total estimated amount to be collected over the lifetime of the instrument. Under the CECL model, reserves may be established against financial asset balances even if the risk of loss is remote or has not yet manifested itself.

Upon adoption of the CECL methodology, the Company developed its estimated loss reserves in the following manner. The Company continued to record specific reserves against account balances of franchisees deemed “at-risk” when a potential loss is likely or imminent as a result of prolonged payment delinquency (greater than 90 days past due) and where notable credit deterioration has become evident. For financial assets that are not currently deemed “at-risk,” an allowance is recorded based

on expected loss rates derived pursuant to the following CECL methodology that assesses four components - historical losses, current conditions, reasonable and supportable forecasts, and a reversion to history, if applicable.

Historical loss rates over a five-year span from 2015 to 2019 were calculated for financial assets with common risk characteristics. The Company believes that the past five years provide a reasonable representation of the Company’s operations and performance through various business cycles, both favorable and unfavorable. The Company also determined historical loss rate data for each franchise brand concept was more relevant than a single blended rate.

Historical losses were determined based on the average charge off method. Under this method, net charge off loss rates (gross charge offs less recoveries divided by average asset balances for the period) were calculated on a quarterly basis commencing with the first quarter of 2015 through the fourth quarter of 2019. The individual quarterly loss rates were then averaged over 20 quarters to derive an overall average 5-year historical loss rates for each financial asset type. As of each measurement date subsequent to the initial adoption, the 5-year average loss rate will be based on the most recent 20 quarters. Historical loss rates are further adjusted by factors related to current conditions and forecasts of future economic conditions.

The Company identified three metrics that it believes provide the most relevant reflection of the current risks inherent in the Company’s franchisee-based restaurant business, as follows: (1) delinquency status, (2) system-wide same-restaurant sales, and (3) four-wall EBITDA profitability. For each metric, restaurant-level data was aggregated at the franchisee level. Each metric was weighted equally at one-third for each individual franchisee, unless certain data is missing or not available as of the quarterly assessment date. On occasion, new restaurant openings, closures/ reassignments, or franchisee failure to submit requested information, can lead to unavailable or missing data. In these cases, the remaining one or two metrics that are available are weighted at 100% or equally at 50% each, respectively.

A separate scale or data range was established for each of the three metrics to gauge each franchisee’s score relative to a pre-determined set of performance expectations. The distribution spread for each metric is static and will not change from one period to the next. The distribution spreads do not reflect the system average; rather, the distribution ranges were determined based on performance levels that the Company believes characterize relative franchisee health.

Based on the range of historical loss rate percentages derived for the various asset categories, the Company has determined that the total adjustment factor to be allocated to the current conditions component of its CECL methodology will be a maximum of 25 basis points (0.25%) for the three months ended March 31, 2020.

During the second half of March 2020, the COVID-19 pandemic resulted in government-mandated restaurant closures in many areas both domestically and internationally. The restaurants that remained open were limited to off-premise sales channels (i.e. delivery and to-go) as dine-in operations were shuttered until further notice. As a result of these developments, system-wide sales decreased significantly. The initial current conditions adjustment factor was increased to account for the potential impact.

The third component in the CECL methodology involves consideration of macroeconomic conditions that can impact the estimate of expected credit losses in the future. The Company did not develop an internal methodology in this regard, rather, the Company utilizes existing, publicly accessible sources of economic data. The Company determined that forecasts of overall unemployment rate as well as consumer spending based on the personal consumption expenditure (PCE) index are two key macroeconomic factors that provide a meaningful outlook of expected consumer behaviors that impact the restaurant industry as well as franchisees' financial performance.

With respect to the unemployment rate, the Company analyzed annual historical data from the U.S. Bureau of Labor Statistics for the past 15 years to get a full view of the range of unemployment rates over a full economic cycle. With respect to consumer spending, the Company analyzed monthly historical data related to personal consumption expenditure (PCE) for the past ten years from 2010 to 2019 from the United States Bureau of Economic Analysis (BEA). The PCE measure is the

CECL requires a lifetime of losses calculated from the time of origination and are updated in each reported quarter for the losses expected over the remaining life of each asset, conditional on historical information, current conditions, and reasonable and supportable forecasts. Absent a reasonable forecast over the full lifetime of a financial asset, entities must forecast their losses over the time frame covered by reasonable and supportable forecasts. After that time period, entities must estimate future losses based on a reversion to unadjusted historical information. The Company has determined that reversion to history was not required since the remaining average lives of the Company’s financial assets are not exceedingly lengthy.

Most of the Company’s short-term receivables due from franchisees are derived from royalty and advertising fees. In addition to royalties and advertising fees, the Company also bills certain IHOP franchisees for franchise notes, equipment notes, and rent payments. Accounts receivable balances also include billings for help desk support services provided to Applebee's and IHOP franchises by the Company’s information technology personnel. As of March 31, 2020, and December 31, 2019, total accounts receivable amounted to $54.0 million and $61.5 million, respectively, predominantly from the Company’s domestic franchise operations, and to a much lesser extent, from restaurant locations outside the United States. The 5-year average historical loss rates related to accounts receivable balances were 0.19% for domestic IHOP franchisees and 1.27% for domestic Applebee's franchisees as of March 31, 2020. For international accounts receivable, 5-year average historical loss rates were 1.0% and 0.32% for IHOP and Applebee's, respectively, as of March 31, 2020.

Notes receivable balances primarily relate to the conversion of certain Applebee's franchisee accounts receivable to notes receivable, and to a lesser degree, cash loans to franchisees for working capital purposes, a note receivable in connection with the sale of IHOP company restaurants in June 2017, and IHOP franchise fee and other notes. The notes are typically collateralized by the franchise. Notes receivable totaled $29.8 million and $29.0 million as of March 31, 2020, and December 31, 2019, respectively. Due to the riskier nature of Applebee's notes that were converted from previously delinquent franchisee accounts receivable balances, a significant portion of these notes have specific reserves recorded against them amounting to $10.4 million as of March 31, 2020. The other notes receivable balances are lower risk in nature, with IHOP notes receivable experiencing no historical losses over the past five years.

Direct financing lease receivables relate to IHOP franchise development activity prior to 2003 when IHOP typically leased or purchased the restaurant site, built and equipped the restaurant, then franchised the restaurant to a franchisee. IHOP provided the financing for leasing or subleasing the site. As of March 31, 2020 and December 31, 2019, the Company’s direct financing lease receivables totaled $31.3 million and $34.0 million, respectively. Direct financing leases at March 31, 2020, comprised 121 leases with a weighted average remaining life of 3.6 years, relate to locations that IHOP is leasing from third parties and subleasing to franchisees. The inherent risk in this portfolio is fairly low based on the 5-year average historical loss rate.

Equipment leases receivable also relate to IHOP franchise development activity prior to 2003. Equipment lease contracts are collateralized by the equipment in the restaurant. The estimated fair value of the equipment collateralizing these lease contracts are not deemed to be significant given the very seasoned and mature nature of this portfolio. As of March 31, 2020 and December 31, 2019, the Company’s equipment leases receivable totaled $54.2 million and $56.3 million, respectively. The fair values of equipment leases are not deemed to be significant given that this portfolio is very seasoned and at the tail end of its collective useful life. The weighted average remaining life of the Company’s equipment leases is 6.0 years as of March 29, 2020. The inherent risk in this portfolio is fairly low based on the 5-year average historical loss rate.

Receivables due from distributors are related to the sale of IHOP’s proprietary pancake and waffle dry mix to franchisees through the Company’s network of suppliers and distributors. Receivables due from IHOP dry mix suppliers and distributors amounted to $3.0 million and $5.3 million, respectively as of March 31, 2020 and December 31, 2019. The inherent risk in this portfolio is fairly low based on the 5-year average historical loss rate.

Gift card receivables consist primarily of amounts due from third-party vendors. Receivables related to gift card sales are subject to seasonality and usually peak around year end as a result of the December holiday season. The Company’s gift card receivables amounted to $2.9 million and $46.6 million as of March 31, 2020 and December 31, 2019, respectively. The quick settlement periods and low risk nature of these assets have resulted in virtually no historical losses over the 5-year loss horizon.



	Accounts Receivable			Notes receivable, short-term			Notes receivable, long-term			Lease Receivables		Equipment Notes		Other⁽¹⁾		Total
	(In thousands)
Balance, December 31, 2019	$	0.7		$	2.4		$	8.2		$	—	$	—	$	—	$	11.3
Increase due to CECL adoption	0.3			0.0			0.1			0.1		0.1		0.1		0.7
Bad debt expense for the three months ended March 31, 2020	0.1			0.2			(0.0		)	0.1		0.1		0.0		0.5
Advertising provision adjustment	1.1			0.1			(0.2		)	—		—		—		1.0
Write-offs	(0.0		)	(0.1		)	—			—		—		—		(0.1		)
Recoveries	—			—			—			0.0		—		—		0.0
Balance, March 31, 2020	$	2.2		$	2.6		$	8.1		$	0.2	$	0.2	$	0.1	$	13.4



	Notes receivable, short-term		Notes receivable, long-term		Lease Receivables		Equipment Notes		Other⁽¹⁾		Total
	(In millions)
Current	$	4.3	$	4.9	$	31.0	$	53.5	$	0.4	$	94.1
30-59 days	0.1		—		0.2		0.1		—		0.4
60-89 days	0.1		—		0.0		0.1		—		0.2
90-119 days	—		—		0.0		0.0		—		—
120+ days	1.0		19.3		—		0.5		—		20.8
Total	$	5.5	$	24.2	$	31.2	$	54.2	$	0.4	$	115.5



	Notes receivable, short and long-term		Lease Receivables		Equipment Notes		Total
	(In millions)
2020	$	1.6	$	—	$	—	$	1.6
2019	7.7		0.9		—		8.6
2018	13.7		—		—		13.7
2017	6.6		—		—		6.6
2016	—		1.4		—		1.4
Prior	0.2		29.0		54.2		83.4
Total	$	29.8	$	31.3	$	54.2	$	115.3