Notes to Consolidated Financial Statements
(Unaudited)
1. BASIS OF PRESENTATION
References to “Brinker,” the "Company,” “we,” “us” and “our” in this Form 10-Q are references to Brinker International, Inc. and its subsidiaries and any predecessor companies of Brinker International, Inc.
Our consolidated financial statements as of
March 23, 2016
and
June 24, 2015
and for the thirteen and
thirty-nine week
periods ended
March 23, 2016
and
March 25, 2015
have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). We are principally engaged in the ownership, operation, development, and franchising of the Chili’s Grill & Bar (“Chili’s”) and Maggiano’s Little Italy (“Maggiano’s”) restaurant brands. At
March 23, 2016
, we owned, operated or franchised
1,647
restaurants in the United States and
30
countries and
two
territories outside of the United States.
The foreign currency translation adjustment included in comprehensive income on the consolidated statements of comprehensive income represents the unrealized impact of translating the financial statements of the Canadian restaurants and the Mexican joint venture from their respective functional currencies to U.S. dollars. This amount is not included in net income and would only be realized upon disposition of the businesses. The accumulated other comprehensive loss is presented on the consolidated balance sheets. We reinvest foreign earnings, therefore, United States deferred income taxes have not been provided on foreign earnings.
The preparation of the consolidated financial statements in conformity with generally accepted accounting principles in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and costs and expenses during the reporting period. Actual results could differ from those estimates.
In November 2015, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2015-17, Balance Sheet Classification of Deferred Taxes (Topic 740), which requires deferred tax assets and liabilities to be classified as noncurrent on the balance sheet. Prior to the issuance of the standard, deferred tax assets and liabilities were required to be separately classified into a current amount and a noncurrent amount on the balance sheet. The standard is effective for annual periods beginning after December 15, 2016, and early adoption is permitted. We elected to early adopt this guidance as of March 23, 2016 and to apply the guidance retrospectively. Accordingly, we reclassified the current deferred tax asset balance of
$2.5 million
to noncurrent on the consolidated balance sheet as of June 24, 2015. Because the application of this guidance affects classification only, the reclassification did not have a material effect on our consolidated financial statements.
The information furnished herein reflects all adjustments (consisting only of normal recurring accruals and adjustments) which are, in our opinion, necessary to fairly state the interim operating results for the respective periods. However, these operating results are not necessarily indicative of the results expected for the full fiscal year. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been omitted pursuant to SEC rules and regulations. The notes to the consolidated financial statements (unaudited) should be read in conjunction with the notes to the consolidated financial statements contained in the
June 24, 2015
Form 10-K. We believe the disclosures are sufficient for interim financial reporting purposes.
2. ACQUISITION OF CHILI'S RESTAURANTS
On
June 25, 2015
, we completed the stock acquisition of
Pepper Dining Holding Corp. ("Pepper Dining")
, a franchisee of
103
Chili's Grill & Bar restaurants primarily located in the Northeast and Southeast United States. The purchase price of
$106.5 million
, excluding cash and customary working capital adjustments of
$0.9 million
, was funded with borrowings from our existing credit facility. The results of operations of these restaurants are included in our consolidated financial statements from the date of acquisition. The assets and liabilities of the restaurants were recorded at their preliminary respective fair values as of the date of acquisition.
During the third quarter of fiscal 2016, we finalized the valuation of the acquired assets and liabilities associated with the Pepper Dining acquisition. The final fair value analysis resulted in a reduction of the recorded amount for property and equipment of approximately
$6.0 million
on the consolidated balance sheet. The fair value reduction associated with property and equipment also resulted in a decrease of approximately
$2.4 million
in the deferred income tax liability associated with the assets. The change in these amounts resulted in a corresponding net increase to goodwill of approximately
$3.4 million
. We do not expect any further adjustments to the Pepper Dining purchase price allocation.
The final allocation of the purchase price is as follows (in thousands):
|
|
|
|
|
Current assets including cash and cash equivalents
(1)
|
$
|
6,331
|
|
Property and equipment
|
64,532
|
|
Goodwill
|
31,912
|
|
Reacquired franchise rights
(2)
|
10,400
|
|
Deferred income taxes
|
15,388
|
|
Favorable leases
|
5,496
|
|
Total assets acquired
|
134,059
|
|
Current liabilities
|
17,800
|
|
Unfavorable leases
|
8,846
|
|
Total liabilities assumed
|
26,646
|
|
Net assets acquired
(1)
|
$
|
107,413
|
|
|
|
(1)
|
The net assets acquired includes cash and cash equivalents of
$1.8 million
.
|
|
|
(2)
|
The reacquired franchise rights have an amortization period of
12 years
.
|
We expect
$12.8 million
of the goodwill balance to be deductible for tax purposes. The portion of the purchase price attributable to goodwill represents the benefits expected as a result of the acquisition, including sales and unit growth opportunities. The acquired restaurants generated approximately
$65.4 million
and
$189.4 million
of revenue for the thirteen and thirty-nine week periods ended March 23, 2016 and are expected to generate approximately
$2.5 million
of average annual revenue per restaurant in fiscal 2016, partially offset by the loss of average annual royalty revenues of approximately
$104,000
per restaurant. Pro-forma financial information of the combined entities is not presented due to the immaterial impact of the financial results of the acquired restaurants on our consolidated financial statements.
3. EARNINGS PER SHARE
Basic earnings per share is computed by dividing net income by the weighted average number of common shares outstanding for the reporting periods. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. For the calculation of diluted earnings per share, the basic weighted average number of shares is increased by the dilutive effect of stock options and restricted share awards determined using the treasury stock method. Stock options and restricted share awards with an anti-dilutive effect are not included in the diluted earnings per share calculation.
Basic weighted average shares outstanding is reconciled to diluted weighted average shares outstanding as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Week Periods Ended
|
|
Thirty-Nine Week Periods Ended
|
|
March 23, 2016
|
|
March 25, 2015
|
|
March 23, 2016
|
|
March 25, 2015
|
Basic weighted average shares outstanding
|
56,673
|
|
|
62,891
|
|
|
58,699
|
|
|
63,719
|
|
Dilutive stock options
|
297
|
|
|
525
|
|
|
337
|
|
|
617
|
|
Dilutive restricted shares
|
437
|
|
|
675
|
|
|
469
|
|
|
772
|
|
|
734
|
|
|
1,200
|
|
|
806
|
|
|
1,389
|
|
Diluted weighted average shares outstanding
|
57,407
|
|
|
64,091
|
|
|
59,505
|
|
|
65,108
|
|
|
|
|
|
|
|
|
|
Awards excluded due to anti-dilutive effect on earnings per share
|
561
|
|
|
19
|
|
|
533
|
|
|
234
|
|
4. LONG-TERM DEBT
Long-term debt consists of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
March 23,
2016
|
|
June 24,
2015
|
Revolving credit facility
|
$
|
590,250
|
|
|
$
|
383,750
|
|
3.88% notes
|
299,788
|
|
|
299,766
|
|
2.60% notes
|
249,925
|
|
|
249,899
|
|
Capital lease obligations
|
38,302
|
|
|
40,849
|
|
|
1,178,265
|
|
|
974,264
|
|
Less current installments
|
(3,605
|
)
|
|
(3,439
|
)
|
|
$
|
1,174,660
|
|
|
$
|
970,825
|
|
During the first nine months of fiscal
2016
,
$256.5 million
was drawn from the $750 million revolving credit facility primarily to fund the acquisition of Pepper Dining and for share repurchases. We repaid a total of
$50.0 million
in the second and third quarters.
The maturity date of the
$750 million
revolving credit facility is
March 12, 2020
. The revolving credit facility bears interest of LIBOR plus an applicable margin, which is a function of our credit rating and debt to cash flow ratio, but is subject to a maximum of LIBOR plus
2.00%
. Based on our current credit rating, we are paying interest at a rate of LIBOR plus
1.38%
.
One month LIBOR
at
March 23, 2016
was approximately
0.43%
. As of
March 23, 2016
,
$159.8 million
of credit is available under the revolving credit facility.
Our debt agreements contain various financial covenants that, among other things, require the maintenance of certain leverage and fixed charge coverage ratios. We are currently in compliance with all financial covenants.
5. OTHER GAINS AND CHARGES
Other gains and charges consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Week Periods Ended
|
|
Thirty-Nine Week Periods Ended
|
|
March 23,
2016
|
|
March 25,
2015
|
|
March 23,
2016
|
|
March 25,
2015
|
Restaurant impairment charges
|
$
|
3,413
|
|
|
$
|
0
|
|
|
$
|
3,937
|
|
|
$
|
747
|
|
(Gain) Loss on the sale of assets, net
|
(1,096
|
)
|
|
0
|
|
|
(2,858
|
)
|
|
1,093
|
|
Impairment of investment
|
1,000
|
|
|
0
|
|
|
1,000
|
|
|
0
|
|
Acquisition costs
|
120
|
|
|
0
|
|
|
700
|
|
|
0
|
|
Restaurant closure charges
|
89
|
|
|
76
|
|
|
89
|
|
|
1,457
|
|
Litigation
|
0
|
|
|
(8,553
|
)
|
|
(2,032
|
)
|
|
(2,753
|
)
|
Severance
|
0
|
|
|
0
|
|
|
2,368
|
|
|
0
|
|
Impairment of liquor licenses
|
0
|
|
|
0
|
|
|
0
|
|
|
175
|
|
Other
|
338
|
|
|
0
|
|
|
2,250
|
|
|
28
|
|
|
$
|
3,864
|
|
|
$
|
(8,477
|
)
|
|
$
|
5,454
|
|
|
$
|
747
|
|
During the third quarter of fiscal 2016, we recorded impairment charges of
$3.4 million
related to two underperforming restaurants identified for closure by management and
$1.0 million
related to a cost method investment. See note 7 for fair value disclosures.
We were a plaintiff in a class action lawsuit against US Foods styled as
In re U.S. Foodservice, Inc. Pricing Litigation
. A settlement agreement was fully executed by all parties in September 2015, and we received approximately
$2.0 million
during the second quarter of fiscal 2016 in settlement of this litigation.
During the first nine months of fiscal 2016, we incurred expenses of
$1.2 million
to reserve for royalties, rents and other outstanding amounts related to a bankrupt franchisee. We also recorded impairment charges of
$0.5 million
primarily related to
a capital lease asset that is subleased to a franchisee and an undeveloped parcel of land that we own for the excess of the carrying amounts over the fair values. See note 7 for fair value disclosures. We incurred
$2.4 million
in severance and other benefits related to organizational changes. Additionally, we recorded
$0.7 million
of transaction costs related to the acquisition of Pepper Dining and a
$2.9 million
gain on the sale of several properties.
We were a plaintiff in the antitrust litigation against Visa and MasterCard styled as
Progressive Casualty Insurance Co., et al. v. Visa, Inc., et al
. A settlement agreement was fully executed by all parties in January 2015, and we received approximately
$8.6 million
per the terms of this agreement in the third quarter of fiscal 2015. During the second quarter of fiscal 2015, the class action lawsuit styled as
Hohnbaum, et al. v. Brinker Restaurant Corp., et al
. was finalized resulting in an additional charge of approximately
$5.8 million
to adjust our previous estimate of the final settlement amount.
During the first nine months of fiscal 2015, we recorded restaurant impairment charges of
$0.7 million
related to underperforming restaurants that either continue to operate or are scheduled to close and
$0.2 million
for the excess of the carrying amount of a transferable liquor license over the fair value. We also recorded a
$1.1 million
charge primarily related to the sale of two company owned restaurants located in Mexico and restaurant closure charges of
$1.5 million
primarily related to lease termination charges.
6. ACCRUED AND OTHER LIABILITIES
Other accrued liabilities consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
March 23,
2016
|
|
June 24,
2015
|
Sales tax
|
$
|
23,338
|
|
|
$
|
20,308
|
|
Insurance
|
24,009
|
|
|
22,658
|
|
Property tax
|
12,492
|
|
|
14,224
|
|
Dividends
|
17,843
|
|
|
16,961
|
|
Other
|
43,656
|
|
|
37,046
|
|
|
$
|
121,338
|
|
|
$
|
111,197
|
|
Other liabilities consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
March 23,
2016
|
|
June 24,
2015
|
Straight-line rent
|
$
|
56,153
|
|
|
$
|
56,345
|
|
Insurance
|
36,178
|
|
|
30,988
|
|
Landlord contributions
|
25,291
|
|
|
24,785
|
|
Unfavorable leases
|
6,864
|
|
|
663
|
|
Unrecognized tax benefits
|
3,903
|
|
|
5,144
|
|
Other
|
7,510
|
|
|
7,108
|
|
|
$
|
135,899
|
|
|
$
|
125,033
|
|
7. FAIR VALUE MEASUREMENTS
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants on the measurement date. In determining fair value, the accounting standards establish a three level hierarchy for inputs used in measuring fair value, as follows:
|
|
•
|
Level 1 – inputs are quoted prices in active markets for identical assets or liabilities.
|
|
|
•
|
Level 2 – inputs are observable for the asset or liability, either directly or indirectly, including quoted prices in active markets for similar assets or liabilities.
|
|
|
•
|
Level 3 – inputs are unobservable and reflect our own assumptions.
|
|
|
(a)
|
Non-Financial Assets Measured on a Non-Recurring Basis
|
We review the carrying amounts of property and equipment and transferable liquor licenses semi-annually or when events or circumstances indicate that the carrying amount may not be recoverable. If the carrying amount is not recoverable, we record an impairment charge for the excess of the carrying amount over the fair value.
We determine the fair value of property and equipment based on discounted projected future cash flows of the restaurants over their remaining service life using a risk adjusted discount rate that is commensurate with the risk inherent in our current business model. Based on our semi-annual review during the second quarter of fiscal 2016, long-lived assets with a carrying value of
$106,000
, primarily related to underperforming restaurants previously impaired, were determined to have
no
fair value resulting in an impairment charge of
$106,000
. During the third quarter of fiscal 2016, two restaurants were identified for closure by management with a combined carrying value of
$3.4 million
. We determined these restaurants have
no
fair value resulting in an impairment charge of
$3.4 million
. During fiscal 2015, long-lived assets with a carrying value of
$747,000
, primarily related to two underperforming restaurants, were determined to have
no
fair value resulting in an impairment charge of
$747,000
.
We determine the fair value of transferable liquor licenses based on prices in the open market for licenses in the same or similar jurisdictions. Based on our semi-annual review during the second quarter of fiscal 2016, we determined there was
no
impairment. During fiscal 2015, one transferable liquor license with a carrying value of
$225,000
was written down to the fair value of
$50,000
resulting in an impairment charge of
$175,000
.
We review the carrying amounts of goodwill and reacquired franchise rights annually or when events or circumstances indicate that the carrying amount may not be recoverable. If the carrying amount is not recoverable, we record an impairment charge for the excess of the carrying amount over the fair value. We determined that there was no impairment of goodwill during our annual test in the second quarter of fiscal 2016 and fiscal 2015 as the fair value of our reporting units was substantially in excess of the carrying values. We also determined that there was no impairment of reacquired franchise rights during our annual test in the second quarter of fiscal 2016 and fiscal 2015. No indicators of impairment were identified through the end of the third quarter of fiscal 2016.
During fiscal 2016, we recorded an impairment charge of
$187,000
related to a parcel of undeveloped land that we own. The land had a carrying value of
$937,000
and was written down to the fair value of
$750,000
. The fair value was based on the sales price of comparable properties. Additionally, we recorded an impairment charge of
$231,000
related to a capital lease asset that is subleased to a franchise. The capital lease asset had a carrying value of
$338,000
and was written down to the fair value of
$107,000
. The fair value of the capital lease asset is based on discounted projected future cash flows from the sublease. During the third quarter of fiscal 2016, we recorded an impairment charge of
$1.0 million
related to a cost method investment which we determined to have
no
fair value.
All impairment charges were included in other gains and charges in the consolidated statements of comprehensive income for the periods presented.
The following table presents fair values for those assets measured at fair value on a non-recurring basis at
March 23, 2016
and
March 25, 2015
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements Using
|
|
(Level 1)
|
|
(Level 2)
|
|
(Level 3)
|
|
Total
|
Long-lived assets held for use:
|
|
|
|
|
|
|
|
At March 23, 2016
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
At March 25, 2015
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
Liquor licenses:
|
|
|
|
|
|
|
|
At March 23, 2016
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
At March 25, 2015
|
$
|
0
|
|
|
$
|
50
|
|
|
$
|
0
|
|
|
$
|
50
|
|
Other long-lived assets:
|
|
|
|
|
|
|
|
At March 23, 2016
|
$
|
0
|
|
|
$
|
750
|
|
|
$
|
107
|
|
|
$
|
857
|
|
At March 25, 2015
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
|
(b)
|
Other Financial Instruments
|
Our financial instruments consist of cash and cash equivalents, accounts receivable, accounts payable and long-term debt. The fair values of cash and cash equivalents, accounts receivable and accounts payable approximate their carrying amounts because of the short maturity of these items. The carrying amount of debt outstanding related to the revolving credit facility approximates fair value as the interest rate on this instrument approximates current market rates (Level 2). The fair values of the
2.60%
notes and
3.88%
notes are based on quoted market prices and are considered Level 2 fair value measurements.
The carrying amounts and fair values of the 2.60% notes and 3.88% notes are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 23, 2016
|
|
June 24, 2015
|
|
Carrying Amount
|
|
Fair Value
|
|
Carrying Amount
|
|
Fair Value
|
2.60% Notes
|
$
|
249,925
|
|
|
$
|
251,018
|
|
|
$
|
249,899
|
|
|
$
|
250,583
|
|
3.88% Notes
|
$
|
299,788
|
|
|
$
|
292,773
|
|
|
$
|
299,766
|
|
|
$
|
290,706
|
|
8. SHAREHOLDERS’ DEFICIT
In August 2015, our Board of Directors authorized a
$250.0 million
increase to our existing share repurchase program resulting in total authorizations of
$4,185.0 million
. We repurchased approximately
5.4 million
shares of our common stock for
$266.2 million
during the
first three quarters
of fiscal
2016
, including shares purchased as part of our share repurchase program and shares repurchased to satisfy team member tax withholding obligations on the vesting of restricted shares. As of
March 23, 2016
, approximately
$351.6 million
was available under our share repurchase authorizations. Our stock repurchase plan has been and will be used to return capital to shareholders and to minimize the dilutive impact of stock options and other share-based awards. We evaluate potential share repurchases under our plan based on several factors, including our cash position, share price, operational liquidity, proceeds from divestitures, borrowings, and planned investment and financing needs. Repurchased common stock is reflected as an increase in treasury stock within shareholders’ deficit.
During the
first three quarters
of fiscal
2016
, we granted approximately
283,000
stock options with a weighted average exercise price per share of
$54.02
and a weighted average fair value per share of
$11.01
, and approximately
308,000
restricted share awards with a weighted average fair value per share of
$49.47
. Additionally, during the
first three quarters
of fiscal
2016
, approximately
173,000
stock options were exercised resulting in cash proceeds of approximately
$4.7 million
. We received an excess tax benefit from stock-based compensation of approximately
$5.4 million
during the
first three quarters
primarily as a result of the vesting and distribution of restricted stock grants and performance shares and stock option exercises. The excess tax benefit from stock-based compensation represents the additional income tax benefit received resulting from the increase in the fair value of awards from the time of grant to the exercise date.
During the
first three quarters
of fiscal
2016
, we paid dividends of
$56.2 million
to common stock shareholders, compared to
$53.2 million
in the prior year. Additionally, our Board of Directors approved a
14%
increase in the quarterly dividend from
$0.28
to
$0.32
per share effective with the dividend declared in August 2015. We also declared a quarterly dividend of
$17.8 million
in February 2016 which was paid on
March 24, 2016
. The dividend accrual was included in other accrued liabilities on our consolidated balance sheet as of
March 23, 2016
.
9. SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for income taxes and interest in the
first three quarters
of fiscal
2016
and
2015
are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
March 23,
2016
|
|
March 25,
2015
|
Income taxes, net of refunds
|
$
|
28,877
|
|
|
$
|
30,329
|
|
Interest, net of amounts capitalized
|
16,842
|
|
|
15,230
|
|
Non-cash investing and financing activities for the
first three quarters
of fiscal
2016
and
2015
are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
March 23,
2016
|
|
March 25,
2015
|
Retirement of fully depreciated assets
|
$
|
16,109
|
|
|
$
|
32,061
|
|
Dividends declared but not paid
|
18,334
|
|
|
18,294
|
|
Accrued capital expenditures
|
7,803
|
|
|
3,357
|
|
10. CONTINGENCIES
In connection with the sale of restaurants to franchisees and brand divestitures, we have, in certain cases, guaranteed lease payments. As of
March 23, 2016
and
June 24, 2015
, we have outstanding lease guarantees or are secondarily liable for
$78.8 million
and
$98.9 million
, respectively. These amounts represent the maximum potential liability of future payments under the guarantees. These leases have been assigned to the buyers and expire at the end of the respective lease terms, which range from fiscal 2016 through fiscal 2025. In the event of default, the indemnity and default clauses in our assignment agreements govern our ability to pursue and recover damages incurred.
No material liabilities have been recorded
as of
March 23, 2016
. Our secondary liability position was reduced by approximately
$19.0 million
in the first quarter of fiscal 2016 related to the Pepper Dining acquisition. See Note 2 for additional disclosures related to the acquisition.
We provide letters of credit to various insurers to collateralize obligations for outstanding claims. As of
March 23, 2016
, we had
$25.3 million
in undrawn standby letters of credit outstanding. All standby letters of credit are renewable annually.
Evaluating contingencies related to litigation is a complex process involving subjective judgment on the potential outcome of future events and the ultimate resolution of litigated claims may differ from our current analysis. Accordingly, we review the adequacy of accruals and disclosures pertaining to litigated matters each quarter in consultation with legal counsel, and we assess the probability and range of possible losses associated with contingencies for potential accrual in the consolidated financial statements.
We are engaged in various legal proceedings and have certain unresolved claims pending. Reserves have been established based on our best estimates of our potential liability in certain of these matters. Based upon consultation with legal counsel, Management is of the opinion that there are
no
matters pending or threatened which are expected to have a material adverse effect, individually or in the aggregate, on our consolidated financial condition or results of operations.
11. SUBSEQUENT EVENTS
Subsequent to the end of the quarter, an additional
$20.0 million
was repaid on the revolver. Additionally, we repurchased approximately
67,000
shares for
$3.0 million
.
12. EFFECT OF NEW ACCOUNTING STANDARDS
In March 2016, the FASB issued ASU 2016-09, Improvements to Employee Share-Based Payment Accounting (Topic 718). This update was issued as part of the FASB’s simplification initiative and affects all entities that issue share-based payment awards to their employees. The amendments in this update cover such areas as the recognition of excess tax benefits and deficiencies, the classification of those excess tax benefits on the statement of cash flows, an accounting policy election for forfeitures, the amount an employer can withhold to cover income taxes and still qualify for equity classification and the classification of those taxes paid on the statement of cash flows. This update is effective for annual and interim periods for fiscal years beginning after December 15, 2016, which will require us to adopt these provisions in the first quarter of fiscal 2018. Early adoption is permitted for financial statements that have not been previously issued. This update will be applied either prospectively, retrospectively or using a cumulative effect transition method, depending on the area covered in this update. We have not yet determined the effect of this update on our ongoing financial reporting.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). This update requires a lessee to recognize on the balance sheet a liability to make lease payments and a corresponding right-of-use asset. The update also requires additional disclosures about the amount, timing, and uncertainty of cash flows arising from leases. This update is effective for annual and interim periods for fiscal years beginning after December 15, 2018, which will require us to adopt these provisions in the first quarter of fiscal 2020. Early adoption is permitted for financial statements that have not been previously issued. This update will be applied on a modified retrospective basis. We have not yet determined the effect of this update on our ongoing financial reporting.
In April 2015, the FASB issued ASU 2015-03, Simplifying the Presentation of Debt Issuance Costs. This update requires that debt issuance costs be presented in the balance sheet as a direct deduction from the associated debt liability. This update is effective for annual and interim periods for fiscal years beginning after December 15, 2015, which will require us to adopt these provisions in the first quarter of fiscal 2017. Early adoption is permitted for financial statements that have not been previously issued. This update will be applied on a retrospective basis. The adoption of this update will not have a material impact on our consolidated financial statements. Our current balance of debt issuance costs was approximately $3.5 million at the end of the third quarter of fiscal 2016.
In April 2015, the FASB issued ASU 2015-05, Customer's Accounting for Fees Paid in a Cloud Computing Arrangement. This update provides guidance to customers about whether a cloud computing arrangement includes a software license and the related accounting treatment. This update is effective for annual and interim periods for fiscal years beginning after December 15, 2015, which will require us to adopt these provisions in the first quarter of fiscal 2017. Early adoption is permitted for financial statements that have not been previously issued. This update may be applied prospectively for all arrangements entered into or materially modified after the effective date or on a retrospective basis. We do not expect the adoption of this update to have a material impact on our consolidated financial statements.
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). The FASB has subsequently amended this update by issuing additional ASU's that provide clarification and further guidance around areas identified as potential implementation issues. These updates provide a comprehensive new revenue recognition model that requires a company to recognize revenue to depict the transfer of goods or services to a customer at an amount that reflects the consideration it expects to receive in exchange for those goods or services. These updates also require additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts. In August 2015, the FASB issued ASU 2015-14 delaying the effective date of adoption. These updates are now effective for annual and interim periods for fiscal years beginning after December 15, 2017, which will require us to adopt these provisions in the first quarter of fiscal 2019. Early application in fiscal 2018 is permitted. These updates permit the use of either the retrospective or cumulative effect transition method. We do not believe the standard will impact our recognition of revenue from company-owned restaurants or our recognition of royalty fees from franchisees. We are continuing to evaluate the impact the adoption of this standard will have on the recognition of other less significant revenue transactions.