6. Revenue Recognition

Adoption of Topic 606

The Company adopted Topic 606 in the first quarter of 2018 with an adjustment to retained earnings to reflect the cumulative impact of adoption. The consolidation of PJMF impacted the cumulative adjustment from adoption as follows:

The change to the cumulative effect of adoption on retained earnings is the result of the consolidation of PJMF in the Company’s consolidated financial statements, as discussed in more detail in Notes 2 and 5. This included a change in the timing of breakage revenue and commission expense recognition under Topic 606.

The adoption of the new guidance changed the reporting of contributions made to PJMF from franchisees and the related advertising fund expenditures, which were not previously included in the Condensed Consolidated Statements of Operations. The new guidance requires these advertising fund contributions and expenditures to be reported on a gross basis in the Condensed Consolidated Statements of Operations.

Disaggregation of Revenue

In the following table (in thousands), revenues are disaggregated by major product line. The table also includes a reconciliation of the disaggregated revenues by the reportable segment.


		Reportable Segments
		Three Months Ended March 31, 2019
Major Products/Services Lines		Domestic Company-owned restaurants		North America commissaries		North America franchising		International		All others		Total
Company-owned restaurant sales	$	161,803	$	-	$	-	$	-	$	-	$	161,803
Commissary sales		-		194,459		-		15,866		-		210,325
Franchise royalties and fees		-		-		18,203		9,801		-		28,004
Other revenues		-		-		-		5,930		54,079		60,009
Eliminations		-		(45,555)		(673)		(97)		(15,411)		(61,736)
Total	$	161,803	$	148,904	$	17,530	$	31,500	$	38,668	$	398,405

		Reportable Segments
		Three Months Ended April 1, 2018
Major Products/Services Lines		Domestic Company-owned restaurants		North America commissaries		North America franchising		International		All others		Total
Company-owned restaurant sales	$	190,242	$	-	$	-	$	3,453	$	-	$	193,695
Commissary sales		-		217,587		-		17,679		-		235,266
Franchise royalties and fees		-		-		25,825		8,982		-		34,807
Other revenues		-		-		-		5,488		54,506		59,994
Eliminations		-		(55,874)		(1,019)		(70)		(16,677)		(73,640)
Total	$	190,242	$	161,713	$	24,806	$	35,532	$	37,829	$	450,122

Contract Balances

Our contract liabilities primarily relate to franchise fees and unredeemed gift card liabilities, which we classify as “Deferred revenue” and customer loyalty program obligations which are classified as “Accrued expenses and other current liabilities.” During the three months ended March 31, 2019 and April 1, 2018, the Company recognized $7.4 million and $4.1 million in revenue, respectively, related to deferred revenue and the customer loyalty program.

The contract liability balances are included in the following (in thousands):


	Contract Liabilities (in thousands)
		March 31, 2019		December 30, 2018		Change
Deferred revenue	$	21,078	$	23,272	$	(2,194)
Customer loyalty program		19,295		18,019		1,276
Total contract liabilities	$	40,373	$	41,291	$	(918)

Our contract assets consist primarily of equipment incentives provided to franchisees. Equipment incentives are related to the future value of commissary revenue the Company will receive over the term of the agreement.

The contract assets were approximately $6.6 million for both March 31, 2019 and December 30, 2018. For the three months ended March 31, 2019, revenue was reduced approximately $800,000 for the amortization of contract assets over the applicable contract terms. Contract assets are included in Other Current Assets and Other Assets.

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	$	2,419	$	2,157	$	1,951	$	1,750	$	1,446	$	3,757	$	13,480

Approximately $2.8 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 franchisees’ revenues. Gift Card liabilities of approximately $4.8 million, included in deferred revenue, will be recognized at Company-owned restaurant revenues when gift cards are redeemed. The Company will recognize redemption fee revenue when cards are redeemed at franchised restaurant locations.

As of March 31, 2019, the amount allocated to the Papa Rewards loyalty program is $19.3 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.

January 1, 2018

(In thousands)

As Reported

As Restated

Cumulative effect of adoption of Topic 606