Cinemark Holdings, Inc. Annual report pursuant to Section 13 and 15(d)

Annual report pursuant to Section 13 and 15(d)

Revenue Recognition

Revenue Recognition

12 Months Ended

Dec. 31, 2018

Revenue From Contract With Customer [Abstract]

3.	REVENUE RECOGNITION

Revenue Recognition Policy

The Company’s patrons have the option to purchase movie tickets well in advance of a movie showtime or right before the movie showtime, or at any point in between those two timeframes depending on seat availability. The Company recognizes such admissions revenues when the showtime for a purchased movie ticket has passed. Concession revenues are recognized when sales are made at the registers. Other revenues primarily consist of screen advertising and transactional fees. Screen advertising revenues are recognized over the period that the related advertising is delivered on-screen or in-theatre. The Company sells gift cards and discount ticket vouchers, the proceeds from which are recorded as current liabilities. Revenues for gift cards and discount ticket vouchers are recognized when they are redeemed for movie tickets or concession items. The Company offers a subscription program in the U.S. whereby patrons can pay a monthly fee to receive a monthly credit for use towards a future movie ticket purchase. The Company records the monthly subscription program fees as current liabilities and records admissions revenues as the credits are redeemed for movie tickets. The Company also has loyalty programs in many of its locations that either have a prepaid annual membership fee or award points to customers as purchases are made. For those loyalty programs that have an annual membership fee, the Company recognizes the fee collected as other revenues over the term of the membership. For those loyalty programs that award points to customers based on their purchases, the Company records a portion of the original transaction proceeds as liabilities based on the number of reward points issued to customers and recognizes revenues when the customer redeems such points. Screen advertising revenues are generally recognized over the period that the related advertising is delivered on-screen or in-theatre. Advances collected on long-term screen advertising, concession and other contracts are recorded as deferred revenues. In accordance with the terms of the agreements, the advances collected on such contracts are recognized during the period in which the Company satisfies the related performance obligations, which may differ from the period in which the advances are collected. These advances are recognized on either a straight-line basis over the term of the contracts or as the Company has met its performance obligations in accordance with the terms of the contracts.

See additional revenue recognition policy considerations, updated for the adoption of ASC Topic 606, below.

Adoption of ASC Topic 606

The Company adopted ASC 606, Revenue from Contracts with Customers, effective January 1, 2018 under the modified retrospective method (cumulative-effect) and therefore, revenue amounts as presented on the consolidated statements of income have not been adjusted for prior periods presented. The Company applied the guidance in ASC 606 only to contracts that had not been completed as of January 1, 2018.

Changes to the way in which the Company recognizes revenue resulted in the following impacts to the consolidated statements of income:

Recording of incremental other revenue and interest expense related to the significant financing component of the Company’s Exhibitor Services Agreement (“ESA”) with NCM, LLC (“NCM”). See further discussion below, including the estimated interest rates assumed in determining the amount of interest expense.

Deferral of a portion of admissions and concession revenues for transactions that include the issuance of loyalty points to customers. To determine the amount of revenues to defer upon issuance of points to customers under its points-based loyalty programs, the Company estimated the values of the rewards expected to be redeemed by its customers for those points. The estimates are based on the rewards that have historically been offered under the loyalty programs, which the Company believes is representative of the rewards to be offered in the future.

Increase in other revenues and an increase in utilities and other expenses due to the presentation of transactional fees on a gross versus net basis.

Increase in other revenues due to the change in amortization methodology for deferred revenue – NCM that is now amortized on a straight-line basis and effective for the entire term of the ESA. The deferred revenue – NCM is related to the Company’s ESA and Common Unit Adjustment agreement with NCM, under which the Company’s performance obligation is to provide NCM with exclusive access to its domestic theatres for purposes of in-theatre advertising over the term of the ESA. Such exclusivity, and therefore the satisfaction of the Company’s performance obligation, is provided to NCM evenly over time. As a result of the change in amortization method, the Company recorded a cumulative effect of accounting change adjustment of $40,526, net of taxes, in retained earnings on January 1, 2018 (see also Note 6).

The significant changes discussed above had the following impact on the Company’s statements of income and cash flows for the year ended December 31, 2018:

	Without Adoption of ASC 606			Impact of Adoption of ASC 606			As Reported
Statement of income:
Admissions revenues	$	1,839,723		$	(5,550	)	$	1,834,173
Concession revenues	$	1,110,703		$	(1,910	)	$	1,108,793
Other revenues	$	161,743		$	117,026		$	278,769
Utilities and other expense	$	354,740		$	93,330		$	448,070
Interest expense - NCM	$	—		$	19,724		$	19,724
Statement of cash flows:
Amortization of deferred revenues, deferred lease incentives and other	$	(17,602	)	$	(4,104	)	$	(21,706	)
Changes in other assets and liabilities - Other long-term liabilities	$	4,082		$	7,592		$	11,674

The impact of adoption of ASC 606 on the Company’s balance sheet as of December 31, 2018 was as follows:

	Without Adoption of ASC 606		Impact of Adoption of ASC 606			As Reported
Balance sheet line items:
Deferred revenue - NCM ⁽¹⁾	$	345,058	$	(57,709	)	$	287,349
Long-term deferred tax liability	$	142,547	$	13,079		$	155,626
Other long-term liabilities	$	42,756	$	7,592		$	50,348
Retained earnings	$	645,933	$	40,526		$	686,459

⁽¹⁾

Includes the cumulative effect of accounting change of $53,605 recorded on January 1, 2018 and the full year impact of the change in amortization method of $4,104 during the year ended December 31, 2018.

The Company applied the practical expedient to exclude sales and other similar taxes collected from customers from its transaction price for purposes of recording revenues. As such, revenues are presented net of such taxes.

Disaggregation of Revenue

The following table presents revenues for the year ended December 31, 2018, disaggregated based on major type of good or service and by reportable operating segment.

	Year Ended
	December 31, 2018
	U.S.		International
	Operating		Operating
Major Goods/Services	Segment ⁽¹⁾		Segment		Consolidated
Admissions revenues	$	1,461,151	$	373,022	$	1,834,173
Concession revenues		892,391		216,402		1,108,793
Screen advertising and promotional revenues		78,591		61,269		139,860
Other revenues		106,824		32,085		138,909
Total revenues	$	2,538,957	$	682,778	$	3,221,735

(1)

U.S. segment revenues include eliminations of intercompany transactions with the international operating segment. See Note 19 for additional information on intercompany eliminations.

The following table presents revenues for the year ended December 31, 2018, disaggregated based on timing of revenue recognition (as discussed above).

	Year Ended
	December 31, 2018
	U.S.		International
	Operating		Operating
	Segment ⁽¹⁾		Segment		Consolidated
Goods and services transferred at a point in time	$	2,453,313	$	608,347	$	3,061,660
Goods and services transferred over time		85,644		74,431		160,075
Total	$	2,538,957	$	682,778	$	3,221,735

(1)

U.S. segment revenues include eliminations of intercompany transactions with the international operating segment. See Note 19 for additional information on intercompany eliminations.

Deferred Revenues

The following table presents changes in the Company’s deferred revenues for the year ended December 31, 2018.

Deferred Revenues	Deferred Revenue - NCM			Other Deferred Revenues ⁽¹⁾			Total
Balance at January 1, 2018	$	351,706		$	86,498		$	438,204
Impact of adoption of ASC Topic 606		(53,605	)		—			(53,605	)
Amounts recognized as accounts receivable		—			6,921			6,921
Cash received from customers in advance		—			156,237			156,237
Common units received from NCM (see Note 6)		5,012			—			5,012
Revenue recognized during period		(15,764	)		(141,176	)		(156,940	)
Foreign currency translation adjustments		—			(2,405	)		(2,405	)
Balance at December 31, 2018	$	287,349		$	106,075		$	393,424

(1)

Includes liabilities associated with outstanding gift cards and SuperSavers, points or rebates outstanding under the Company’s loyalty and membership programs and revenues not yet recognized for screen advertising and other promotional activities. Classified as accounts payable and accrued expenses or other long-term liabilities on the consolidated balance sheet.

The table below summarizes the aggregate amount of the transaction price allocated to performance obligations that are unsatisfied as of December 31, 2018 and when the Company expects to recognize this revenue.

	Twelve Months Ended December 31,
Remaining Performance Obligations	2019		2020		2021		2022		2023		Thereafter		Total
Deferred revenue - NCM	$	15,831	$	15,831	$	15,831	$	15,831	$	15,831	$	208,194	$	287,349
Deferred revenue - other		89,523		16,146		207		199		—		—		106,075
Total	$	105,354	$	31,977	$	16,038	$	16,030	$	15,831	$	208,194	$	393,424

Accounts receivable as of December 31, 2018 included approximately $48,117 of receivables related to contracts with customers. The Company did not record any assets related to the costs to obtain or fulfill a contract with customers during the year ended December 31, 2018.

Significant Financing Component

As discussed further in Note 6, in connection with the completion of the NCM, Inc. (“NCMI”) initial public offering, the Company amended and restated its ESA with NCM and received approximately $174,000 in cash consideration from NCM. The proceeds were recorded as deferred revenue and are being amortized over the term of the modified ESA, or through February 2037. In addition to the consideration received upon the ESA modification during 2007, the Company also receives consideration in the form of common units from NCM, at each annual common unit adjustment settlement, in exchange for exclusive access to the Company’s newly opened domestic screens under the ESA. See Note 6 for additional information regarding the common unit adjustment and related accounting. Due to the significant length of time between receiving the consideration from NCM and fulfillment of the related performance obligation, the ESA includes an implied significant financing component, as per the guidance in ASC Topic 606.

As a result of the significant financing component on deferred revenue - NCM, the Company recognized incremental screen advertising revenue and an offsetting interest expense of $19,724 during the year ended December 31, 2018. The interest expense was calculated using the Company’s incremental borrowing rates at the time when the cash and each tranche of common units were received from NCM, which ranged from 5.5% to 8.0%.