3. Adoption of ASU 2014-09, “Revenue from Contracts with Customers”

The Company adopted Topic 606 using the modified retrospective transition method effective January 1, 2018. Results for reporting periods beginning after January 1, 2018 are presented in accordance with Topic 606, while prior period amounts are not adjusted and continue to be reported in accordance with our historical accounting under Topic 605, Revenue Recognition.

The cumulative effect adjustment of $21.5 million was recorded as a reduction to retained earnings as of January 1, 2018 to reflect the impact of adopting Topic 606. The impact of applying Topic 606 for the three and six months ended July 1, 2018, was an increase in revenues of $1.8 million and $4.3 million respectively and a decrease in pre-tax income of $1.4 million and $1.9 million, respectively.

The adoption of Topic 606 did not impact the recognition and reporting of our three largest sources of revenue: sales from Company-owned restaurants, commissary sales, or continuing royalties or other revenues from franchisees that are based on a percentage of the franchise sales. The items impacted by the adoption include the presentation and amount of our loyalty program costs, the timing of franchise and development fees revenue recognition, and the presentation of various domestic and international advertising funds as further described below.

Cumulative adjustment from adoption

As noted above, an after-tax reduction of $21.5 million was recorded to retained earnings in the first quarter of 2018 to reflect the cumulative impact of adopting Topic 606. This is comprised of $10.8 million related to franchise fees, $8.0 million related to the customer loyalty program and $2.7 million related to marketing funds.

The following chart presents the specific line items impacted by the cumulative adjustment.


						Adjusted
	As Reported					Balance Sheet
	December 31,			Total		at January 1,
(In thousands, except per share amounts)	2017			Adjustments		2018

Assets
Current assets:
Cash and cash equivalents	$	22,345	$	4,279	$	26,624
Accounts receivable, net		64,644		493		65,137
Notes receivable, net		4,333		—		4,333
Income tax receivable		3,903		—		3,903
Inventories		30,620		—		30,620
Prepaid expenses		28,522		(4,959)		23,563
Other current assets		9,494		—		9,494
Assets held for sale		6,133		—		6,133
Total current assets		169,994		(187)		169,807
Property and equipment, net		234,331		—		234,331
Notes receivable, less current portion, net		15,568		—		15,568
Goodwill		86,892		—		86,892
Deferred income taxes, net		585		—		585
Other assets		48,183		(907)		47,276
Total assets	$	555,553	$	(1,094)	$	554,459

Liabilities and stockholders’ equity (deficit)
Current liabilities:
Accounts payable	$	32,006	$	(2,161)	$	29,845
Income and other taxes payable		10,561		—		10,561
Accrued expenses and other current liabilities		70,293		15,860		86,153
Deferred revenue current		—		2,400		2,400
Current portion of long-term debt		20,000		—		20,000
Total current liabilities		132,860		16,099		148,959
Deferred revenue		2,652		10,798		13,450
Long-term debt, less current portion, net		446,565		—		446,565
Deferred income taxes, net		12,546		(6,464)		6,082
Other long-term liabilities		60,146		—		60,146
Total liabilities		654,769		20,433		675,202

Redeemable noncontrolling interests		6,738		—		6,738

Stockholders’ equity (deficit):
Preferred stock ($0.01 par value per share; no shares issued)		—		—		—
Common stock ($0.01 par value per share; issued 44,221 at December 31, 2017		442		—		442
Additional paid-in capital		184,785		—		184,785
Accumulated other comprehensive loss		(2,117)		—		(2,117)
Retained earnings		292,251		(21,527)		270,724
Treasury stock (10,290 shares at December 31, 2017, at cost)		(597,072)		—		(597,072)
Total stockholders’ (deficit), net of noncontrolling interests		(121,711)		(21,527)		(143,238)
Noncontrolling interests in subsidiaries		15,757		—		15,757
Total stockholders’ (deficit)		(105,954)		(21,527)		(127,481)
Total liabilities, redeemable noncontrolling interests and stockholders’ (deficit)	$	555,553	$	(1,094)	$	554,459

The impact of adoption for the second quarter of 2018 is as follows:



	As Reported					Balance Sheet
	July 1,			Total		Without Adoption
(In thousands, except per share amounts)	2018			Adjustments		of Topic 606

Assets
Current assets:
Cash and cash equivalents	$	25,719	$	(3,130)	$	22,589
Accounts receivable, net		62,973		(359)		62,614
Notes receivable, net		5,180		—		5,180
Income tax receivable		—		—		—
Inventories		27,109		—		27,109
Prepaid expenses		26,729		4,827		31,556
Other current assets		7,223		—		7,223
Assets held for sale		2,786		—		2,786
Total current assets		157,719		1,338		159,057
Property and equipment, net		227,722		—		227,722
Notes receivable, less current portion, net		15,648		—		15,648
Goodwill		85,064		—		85,064
Deferred income taxes, net		709		—		709
Other assets		71,309		907		72,216
Total assets	$	558,171	$	2,245	$	560,416

Liabilities and stockholders’ equity (deficit)
Current liabilities:
Accounts payable	$	33,307	$	1,493	$	34,800
Income and other taxes payable		8,904		—		8,904
Accrued expenses and other current liabilities		81,197		(15,457)		65,740
Deferred revenue current		2,426		(2,426)		—
Current portion of long-term debt		20,000		—		20,000
Total current liabilities		145,834		(16,390)		129,444
Deferred revenue		15,329		(11,157)		4,172
Long-term debt, less current portion, net		556,387		—		556,387
Deferred income taxes, net		5,140		6,682		11,822
Other long-term liabilities		78,515		—		78,515
Total liabilities		801,205		(20,865)		780,340

Redeemable noncontrolling interests		7,356		—		7,356

Stockholders’ equity (deficit):
Preferred stock ($0.01 par value per share; no shares issued)		—		—		—
Common stock ($0.01 par value per share; issued 44,280 at July 1, 2018)		443		—		443
Additional paid-in capital		188,026		—		188,026
Accumulated other comprehensive income (loss)		2,240		—		2,240
Retained earnings		285,460		23,091		308,551
Treasury stock (12,733 shares at July 1, 2018, at cost)		(742,695)		—		(742,695)
Total stockholders’ (deficit), net of noncontrolling interests		(266,526)		23,091		(243,435)
Noncontrolling interests in subsidiaries		16,136		19		16,155
Total stockholders’ (deficit)		(250,390)		23,110		(227,280)
Total liabilities, redeemable noncontrolling interests and stockholders’ (deficit)	$	558,171	$	2,245	$	560,416


	As Reported
	Three Months Ended				Income Statement
	July 1,		Total		Without Adoption of
(In thousands, except per share amounts)	2018		Adjustments		Topic 606
Revenues:
Domestic Company-owned restaurant sales	$	181,379	$	812	$	182,191
North America franchise royalties and fees		23,912		82		23,994
North America commissary		153,455		—		153,455
International		29,069		175		29,244
Other revenues		20,144		(2,883)		17,261
Total revenues		407,959		(1,814)		406,145
Costs and expenses:
Operating costs (excluding depreciation and amortization shown separately below):
Domestic Company-owned restaurant expenses		147,781		(272)		147,509
North America commissary		143,300		—		143,300
International expenses		18,248		—		18,248
Other expenses		20,698		(2,951)		17,747
General and administrative expenses		38,712		34		38,746
Depreciation and amortization		11,731		—		11,731
Total costs and expenses		380,470		(3,189)		377,281
Refranchising loss, net		(2,122)		—		(2,122)
Operating income		25,367		1,375		26,742
Net Interest expense		(5,662)		—		(5,662)
Income before income taxes		19,705		1,375		21,080
Income tax expense		7,040		306		7,346
Net income before attribution to noncontrolling interests		12,665		1,069		13,734
Income attributable to noncontrolling interests		(874)		—		(874)
Net income attributable to the Company	$	11,791	$	1,069	$	12,860

Calculation of income for earnings per share:
Net income attributable to the Company	$	11,791	$	1,069	$	12,860
Net income attributable to participating securities		(72)		—		(72)
Net income attributable to common shareholders	$	11,719	$	1,069	$	12,788

Basic earnings per common share	$	0.37	$	0.03	$	0.40
Diluted earnings per common share	$	0.36	$	0.03	$	0.40

Basic weighted average common shares outstanding		31,941		31,941		31,941
Diluted weighted average common shares outstanding		32,175		32,175		32,175


	As Reported
	Six Months Ended				Income Statement
	July 1,		Total		Without Adoption of
(In thousands, except per share amounts)	2018		Adjustments		Topic 606
Revenues:
Domestic Company-owned restaurant sales	$	371,621	$	1,076	$	372,697
North America franchise royalties and fees		48,718		120		48,838
North America commissary		315,168		—		315,168
International		59,183		324		59,507
Other revenues		40,638		(5,770)		34,868
Total revenues		835,328		(4,250)		831,078
Costs and expenses:
Operating costs (excluding depreciation and amortization shown separately below):
Domestic Company-owned restaurant expenses		305,100		(338)		304,762
North America commissary		294,981		—		294,981
International expenses		37,278		—		37,278
Other expenses		41,656		(6,310)		35,346
General and administrative expenses		78,441		538		78,979
Depreciation and amortization		23,270		—		23,270
Total costs and expenses		780,726		(6,110)		774,616
Refranchising loss, net		(1,918)		—		(1,918)
Operating income		52,684		1,860		54,544
Net Interest expense		(10,617)		—		(10,617)
Income before income taxes		42,067		1,860		43,927
Income tax expense		12,022		418		12,440
Net income before attribution to noncontrolling interests		30,045		1,442		31,487
Income attributable to noncontrolling interests		(1,517)		—		(1,517)
Net income attributable to the Company	$	28,528	$	1,442	$	29,970

Calculation of income for earnings per share:
Net income attributable to the Company	$	28,528	$	1,442	$	29,970
Net income attributable to participating securities		(147)		—		(147)
Net income attributable to common shareholders	$	28,381	$	1,442	$	29,823

Basic earnings per common share	$	0.87	$	0.04	$	0.91
Diluted earnings per common share	$	0.86	$	0.04	$	0.91

Basic weighted average common shares outstanding		32,610		32,610		32,610
Diluted weighted average common shares outstanding		32,860		32,860		32,860

Transaction Price Allocated to the Remaining Performance Obligations

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


		Performance Obligations by Period
	Less than 1 Year		1-2 Years		2-3 Years		3-4 Years		4-5 Years		Thereafter		Total
Franchise Fees	$	2,426	$	2,179	$	1,948	$	1,732	$	1,503	$	3,795	$	13,583

An additional $4.2 million of area development fees related to unopened stores and unearned royalties are included in deferred revenue. Timing of revenue recognition is dependent upon the timing of store openings and franchisee’s revenues.

As of July 1, 2018, the amount allocated to the Papa Rewards loyalty program is $15.8 million and is reflected in the Condensed Consolidated Balance Sheet as part of the contract liability included in accrued expenses and other current liabilities. This will be recognized as revenue as the points are redeemed, which is expected to occur within the next year.

The Company applies the practical expedient in ASU paragraph 606-10-50-14 and does not disclose information about remaining performance obligations that have original expected durations of one year or less.