NOTE 2—REVENUE RECOGNITION

The Company adopted ASC 606 on January 1, 2018 using the modified retrospective method; and therefore, the comparative information has not been adjusted for the three and nine months ended September 30, 2017.

The cumulative effect of the changes made to the consolidated balance sheet at January 1, 2018 for the adoption of ASC 606, are included in the following table:


(In millions)	Balance at December 31, 2017 Without Adoption of ASC 606		Adjustments Due to ASC 606		Balance at January 1, 2018
Assets:
Other long-term assets	$	475.9	$	11.1	$	487.0
Current liabilities:
Deferred revenues and income		401.0		(10.0)		391.0
Long-term liabilities:
Exhibitor services agreement		530.9		52.9		583.8
Stockholders' equity:
Accumulated deficit		(207.9)		(31.8)		(239.7)

The disclosure of the impact of the adoption of ASC 606 on the Company’s consolidated statement of operations is as follows:


	Three Months Ended September 30, 2018
(In millions)	Without Adoption of ASC 606		Adjustments		As Reported
Revenues:
Admissions	$	751.7	$	(0.3)	$	751.4
Food and beverage		384.9		(0.1)		384.8
Other theatre		73.9		11.3		85.2
Total revenues		1,210.5		10.9		1,221.4
Operating costs and expenses:
Operating expense, excluding depreciation and amortization		395.2		5.3		400.5
Non-cash interest expense related to NCM exhibitor service agreement		—		10.3		10.3
Net loss		(95.7)		(4.7)		(100.4)


	Nine Months Ended September 30, 2018
(In millions)	Without Adoption of ASC 606		Adjustments		As Reported
Revenues:
Admissions	$	2,523.7	$	(1.0)	$	2,522.7
Food and beverage		1,236.7		(0.3)		1,236.4
Other theatre		252.3		36.1		288.4
Total revenues		4,012.7		34.8		4,047.5
Operating costs and expenses:
Operating expense, excluding depreciation and amortization		1,216.4		20.5		1,236.9
Non-cash interest expense related to NCM exhibitor service agreement		—		31.2		31.2
Net loss		(43.6)		(16.9)		(60.5)

Revenues: The Company recognizes revenue, net of sales tax, when it satisfies a performance obligation by transferring control over a product or service to a customer. Admissions and food and beverage revenues are recognized at a point in time when a film is exhibited to a customer and when a customer takes possession of food and beverage offerings. The Company defers 100% of the revenue associated with the sales of gift cards and exchange tickets until such time as the items are redeemed or estimated income from non-redemption is recorded.

The Company recognizes income from non-redeemed or partially redeemed gift cards in proportion to the pattern of rights exercised by the customer (“proportional method”) where it applies an estimated non-redemption rate for its gift card sales channels, which range from 12% to 18% of the current month sales, and the Company recognizes in other theatre revenues the total amount of expected income for non-redemption for that current month’s sales as income over the next 24 months in proportion to the pattern of actual redemptions. The Company has determined its non-redeemed rates and redemption patterns using data accumulated over ten years. Prior to January 1, 2018, income for non-redeemed exchange tickets were recognized 18 months after purchase when the redemption of these items was determined to be remote. At January 1, 2018, the Company changed its method for recognizing income from non-redeemed exchange tickets to the proportional method, where it applies a non-redemption rate of 10% to the current month sales, and the Company recognizes the total amount of income for that current month’s sales as income over the next 24 months in proportion to the pattern of actual redemptions. Management believes the 24-month estimate is supported by its continued development of redemption history and that it is reflective of management’s current best estimate. The adoption of the proportional method of recognizing income from non-redeemed exchange tickets did not have a material impact on the Company’s consolidated financial statements.

Prior to January 1, 2018, the Company recorded online ticket fee revenues net of third-party commission or service fees. In accordance with ASC 606 guidance, the Company believes that it is a principal (as opposed to agent) in the arrangement with third-party internet ticketing companies in regard to the sale of online tickets because the Company controls the online tickets before it is transferred to the customer. Upon adoption of ASC 606 on January 1, 2018, the Company recognizes ticket fee revenues based on a gross transaction price. The online ticket fee revenues and the third-party commission or service fees are recorded in the line items other theatre revenues and operating expense, respectively, in the consolidated statements of operations. These changes did not have any impact on net income or cash flows from operations.

Exhibitor Services Agreement: The Company recognizes advertising revenues, which are included in other theatre revenues in the consolidated statements of operations, when it satisfies a performance obligation by transferring a promised good or service to the customers. The advertising contracts with customers generally consist of a series of distinct periods of service, satisfied over time, to provide rights to advertising services. The Company’s ESA with NCM includes a significant financing component due to the significant length of time between receiving the noncash consideration and fulfilling the performance obligation. The Company receives the non-cash consideration in the form of common membership units from NCM, in exchange for rights to exclusive access to the Company’s theatre screens and attendees through February 2037. Upon adoption of ASC 606, the Company’s advertising revenues have significantly increased with a similar offsetting increase in non-cash interest expense, which is recorded to non-cash NCM exhibitor service agreement in the consolidated statements of operations. Upon adoption of ASC 606 and pursuant to the calculation requirements for the time value of money, the amortization method reflects the front-end loading of the significant financing component where more interest expense is recognized earlier during the term of the agreement than the back-end recognition of the deferred revenue amortization where more revenue is recognized later in the term of the agreement. See Note 5—Investments for further information regarding the common unit adjustment and the fair value measurement of the noncash consideration. The interest expense was calculated using discount rates that ranged from 6.5% to 8.5%, which are the rates at which the Company believes it could borrow in separate financing transactions. The Company recognized a cumulative effect transition adjustment of initially applying ASC 606 by increasing accumulated deficit on January 1, 2018 by approximately $52.9 million, including income tax effect of $0, as a result of this change. These changes did not have any impact on the Company’s cash flows from operations.

Customer Frequency Program: AMC Stubs® is a customer loyalty program which allows members to earn rewards, receive discounts and participate in exclusive members-only offerings and services. In July 2016, the Company completed a national relaunch of its AMC Stubs® loyalty program featuring both a traditional paid tier called AMC Stubs PremiereTM and a new non-paid tier called AMC Stubs InsiderTM. Both programs reward loyal guests for their patronage of AMC Theatres. The AMC Stubs InsiderTM tier rewards guests for simply coming to the movies, and benefits include free refills on certain food items, discount ticket offers, a birthday gift and 20 reward points earned for every dollar spent. For a $15.00 annual membership fee, AMC Stubs PremiereTM members enjoy express service with specially marked shorter lines at the box office and concession stand, free size upgrades on certain food and beverage items, discount ticket offers, a birthday gift, discounted online ticketing fees and 100 reward points for every dollar spent. Some of the rewards earned are redeemable on future purchases at AMC locations. Once an AMC Stubs PremiereTM or AMC Stubs InsiderTM member accumulates 5,000 points they will earn a $5.00 virtual reward.

The portion of the admissions and food and beverage revenues attributed to the rewards is deferred as a reduction of admissions and food and beverage revenues and is allocated between admissions and food and beverage revenues based on expected member redemptions. Upon redemption, deferred rewards are recognized as revenues along with associated cost of goods. Converted rewards not redeemed within nine months are forfeited and recognized as admissions or food and beverage revenues. Prior to January 1, 2018, rewards for expired memberships were forfeited based upon specified periods of inactivity of the membership and recognized as admissions or food and beverage revenues. As of January 1, 2018, the Company changed its method for recognizing forfeited rewards from the remote method to the proportional method, where the Company estimates point breakage in assigning value to the points at the time of sale based on historical trends. The program’s annual membership fee is allocated to the material rights for discounted or free products and services and is initially deferred, net of estimated refunds, and recognized as the rights are redeemed based on estimated utilization, over the one-year membership period in admissions, food and beverage, and other revenues. A portion of the revenues related to a material right are deferred as a virtual rewards performance obligation using the relative standalone selling price method and are recognized as the rights are redeemed or expire.

Disaggregation of Revenue: Revenue is disaggregated in the following tables by major revenue types and by timing of revenue recognition:


	Three Months Ended		Nine Months Ended
(In millions)	September 30, 2018		September 30, 2018
Major revenue types
Admissions	$	751.4	$	2,522.7
Food and beverage		384.8		1,236.4
Other theatre:
Advertising		31.2		102.5
Other theatre		54.0		185.9
Other theatre		85.2		288.4
Total revenues	$	1,221.4	$	4,047.5


	Three Months Ended		Nine Months Ended
(In millions)	September 30, 2018		September 30, 2018
Timing of revenue recognition
Products and services transferred at a point in time	$	1,162.4	$	3,891.8
Products and services transferred over time (1)		59.0		155.7
Total revenues	$	1,221.4	$	4,047.5

(1)

Amounts primarily include advertising revenues.

The following tables provide the balances of receivables and deferred revenue income:


(In millions)	September 30, 2018		December 31, 2017
Current assets:
Receivables related to contracts with customers	$	74.3	$	204.3
Miscellaneous receivables		80.9		67.2
Receivables, net	$	155.2	$	271.5


(In millions)	September 30, 2018		December 31, 2017
Current liabilities:
Deferred revenue related to contracts with customers	$	288.6	$	376.1
Miscellaneous deferred income		4.6		24.9
Deferred revenue and income	$	293.2	$	401.0

The significant changes in contract liabilities with customers included in deferred revenues and income are as follows:


	Deferred Revenues
	Related to Contracts
(In millions)	with Customers
Balance as of December 31, 2017	$	376.1
Cumulative effect of initially applying ASC 606		(10.0)
Cash received in advance (1)		285.6
Customer loyalty rewards accumulated, net of expirations:
Admission revenues (2)		21.8
Food and beverage (2)		39.1
Other theatre (2)		3.9
Reclassification to revenue as the result of performance obligations satisfied:
Admission revenues (3)		(304.0)
Food and beverage (3)		(61.5)
Other theatre (4)		(61.6)
Business combination - Nordic purchase price allocation (5)		(2.3)
Foreign currency translation adjustment		1.5
Balance as of September 30, 2018	$	288.6

(1)

Includes movie tickets, food and beverage, gift cards, exchange tickets, and AMC Stubs® loyalty membership fees.

(2)

Amount of rewards accumulated, net of expirations, that are attributed to AMC Stubs® and other loyalty programs.

(3)

Amount of rewards redeemed that are attributed to gift cards, exchange tickets, movie tickets, AMC Stubs® loyalty programs and other loyalty programs.

(4)

Amounts relate to income from non-redeemed or partially redeemed gift cards, non-redeemed exchange tickets, AMC Stubs® loyalty membership fees and other loyalty programs.

(5)

See Note 3 – Acquisitions for further information.

The significant changes to contract liabilities included in the exhibitor services agreement, classified as long-term liabilities in the consolidated balance sheets, are as follows:


	Exhibitor Services
(In millions)	Agreement
Balance as of December 31, 2017	$	530.9
Cumulative effect of initially applying ASC 606		52.9
Common Unit Adjustment – surrender of common units (1)		(5.2)
Reclassification of the beginning balance to other theatre revenue, as the result of performance obligations satisfied		(10.9)
Balance as of September 30, 2018	$	567.7

(1)

Represents the fair value amount of the NCM common units that were surrendered due to the annual Common Unit Adjustment. Such amount will reduce the deferred revenues that are being amortized to other theatre revenues over the remainder of the 30-year term of the ESA ending in February 2037. See Note 5—Investments for further information.

Transaction Price Allocated to the Remaining Performance Obligations: The following table includes the amount of NCM ESA, included in deferred revenues and income in the Company’s consolidated balance sheets, that is expected to be recognized as revenues in the future related to performance obligations that are unsatisfied as of September 30, 2018:


(In millions)	Three Months Ended December 31, 2018		Year Ended 2019		Year Ended 2020		Year Ended 2021		Year Ended 2022		Years Ended 2023 through February 2037
Exhibitor services agreement	$	3.7	$	15.7	$	16.8	$	18.1	$	19.4	$	494.0

The total amount of non-redeemed gifts cards and exchange tickets included in deferred revenues and income as of September 30, 2018 was $220.8 million. This will be recognized as revenues as the gift cards and exchange tickets are redeemed or as the non-redeemed gift card and exchange ticket revenues are recognized in proportion to the pattern of actual redemptions, which is estimated to occur over the next 24 months.

As of September 30, 2018, the amount of deferred revenue allocated to the AMC Stubs® loyalty programs included in deferred revenues and income was $45.6 million. The earned points will be recognized as revenue as the points are redeemed, which is estimated to occur over the next 24 months. The annual membership fee is recognized ratably over the one-year membership period.

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