Dunkin’ Brands Group — more commonly known as Dunkin Donuts — filed its 2017 Form 10-K this week, including a long discussion of how the new accounting standard for revenue recognition will affect its business.
You may want to pour a fresh cup of coffee for this one. We have a lot to cover.
Dunkin served up more than 850 words of disclosure to investors, plus six tables showing how adoption of the new standard will affect revenues. We’ve seen a few other filers disclose more words, but six tables of data might be a new record.
The company plans to implement the new revenue standard this year, using the “full retrospective method” — that is, it will restate all its 2016 and 2017 revenues to match the new numbers to be reported in 2018. Hence the six tables: income statement, balance sheet, and cash flows, for both 2016 and 2017.
The restated numbers are significant. For example, applying the new standard to fiscal 2017, revenue rose from $860.5 million to $1.27 billion. That’s mostly due to advertising fees from franchisees; the new standard requires them to be reported on the income statement, and they totaled nearly $471 million in 2017.
Then again, the new standard also requires Dunkin to report more advertising expenditures on behalf of franchisees — which put $476 million in new advertising costs onto the income statement, too. So net income actually declines according to the new standard, from $351 million (old standard) to $271.2 million (new).
See Figure 1, below.
Again, Dunkin isn’t “losing” any revenue by adopting the new standard. The standard simply forces companies to recognize revenue in new ways. That can lead to changes (sometimes material ones) in the timing and nature of revenue, but not in the overall amounts of revenue the company sees. A sale is still a sale, after all.
But look! That fourth column from the left! Dunkin also wins the prize for oddest revenue recognition disclosure ever: a $14.3 million adjustment flagged as the ice cream royalty allocation! Let’s go straight to the source:
The adoption of the new guidance will require a portion of sales of ice cream products to be allocated to royalty income as consideration for the use of the franchise license. As such, a portion of sales of ice cream and other products will be reclassified to franchise fees and royalty income in the consolidated statements of operations under the new guidance. This allocation will have no impact on the timing of recognition of the related sales of ice cream products or royalty income.
We have so many questions. When did Dunkin first realize ice cream allocation was a thing? Why no segment reporting for soft serve and standard ice cream? Did Dunkin discuss this with its audit firm? Did they discuss over lunch? Was ice cream on the menu? Did anyone offer an in-kind arrangement, to pay hourly audit fees in ice cream?
Overall, however, Dunkin Brands is a stellar example of how to talk about the new revenue recognition standard. You can find our previous posts about revenue recognition by searching our blog archives, and don’t forget our research papers examining revenue recognition, too! Tax reform may be all the rage right now, but Calcbench will still keep an eye on this issue throughout 2018.