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Analysis of Revenues

Difficulty: Advanced

Revenue Recognition Accounting Policy

McDonald’s revenues consist of sales by Company-operated restaurants and fees from franchised restaurants operated by conventional franchisees, developmental licensees and foreign affiliates.

Sales by Company-operated restaurants are recognized on a cash basis. McDonald’s presents sales net of sales tax and other sales-related taxes. Revenues from conventional franchised restaurants include rent and royalties based on a percent of sales with minimum rent payments, and initial fees. Revenues from restaurants licensed to foreign affiliates and developmental licensees include a royalty based on a percent of sales, and may include initial fees. Continuing rent and royalties are recognized in the period earned. For the periods presented, initial fees are recognized upon opening of a restaurant or granting of a new franchise term.

In May 2014, the FASB issued guidance codified in Accounting Standards Codification ("ASC") 606, "Revenue Recognition - Revenue from Contracts with Customers," which amends the guidance in former ASC 605, "Revenue Recognition." The core principle of the standard is to recognize revenue when promised goods or services are transferred to customers in an amount that reflects the consideration expected to be received for those goods or services. The standard also calls for additional disclosures around the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. McDonald’s will adopt the standard effective January 1, 2018.

The standard may be applied retrospectively to each prior period presented or retrospectively with the cumulative effect recognized as of the date of adoption ("modified retrospective method"). McDonald’s has selected to apply the modified retrospective method.

McDonald’s has determined that this standard will not impact its recognition of revenue from Company-operated restaurants or its recognition of royalties from restaurants operated by franchisees or licensed to affiliates and developmental licensees, which are based on a percent of sales. The standard will change the manner in which McDonald’s recognizes initial fees from franchisees for new restaurant openings or from new franchise terms.

McDonald’s accounting policy through December 31, 2017 was to recognize initial franchise fees when a new restaurant opens or at the start of a new franchise term. In accordance with the new guidance, the initial franchise services are not distinct from the continuing rights or services offered during the term of the franchise agreement, and will therefore be treated as a single performance obligation. As such, beginning in January 2018, initial fees received will be recognized over the franchise term, which is generally 20 years.

The cumulative catch-up adjustment to be recorded upon adoption is expected to consist of deferred revenue of approximately $600 million within long-term liabilities and approximately $150 million of additional deferred tax assets within miscellaneous other assets on the consolidated balance sheet. McDonald’s expects the adoption of this standard to negatively impact 2018 consolidated franchised revenues and franchised margins by approximately $50 million. No impact to McDonald’s consolidated statement of cash flows is expected as the initial fees will continue to be collected upon store opening date or the beginning of a new franchise term.

Source: 10-K (filing date: 2018-02-23).

Revenues as Reported

McDonald’s Corp., Income Statement, Revenues

USD $ in thousands

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12 months ended Dec 31, 2017 Dec 31, 2016 Dec 31, 2015 Dec 31, 2014 Dec 31, 2013
Sales by Company-operated restaurants hidden hidden hidden hidden hidden
Rents hidden hidden hidden hidden hidden
Royalties hidden hidden hidden hidden hidden
Initial fees hidden hidden hidden hidden hidden
Revenues from franchised restaurants hidden hidden hidden hidden hidden
Revenues hidden hidden hidden hidden hidden

Based on: 10-K (filing date: 2018-02-23), 10-K (filing date: 2017-03-01), 10-K (filing date: 2016-02-25), 10-K (filing date: 2015-02-24), 10-K (filing date: 2014-02-24).

Item Description The company
Revenues Amount of revenue recognized from goods sold, services rendered, insurance premiums, or other activities that constitute an earning process. Includes, but is not limited to, investment and interest income before deduction of interest expense when recognized as a component of revenue, and sales and trading gain (loss). McDonald’s Corp.’s revenues declined from 2015 to 2016 and from 2016 to 2017.