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Section 1: 10-Q (10-Q)

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Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

 
 
Form 10-Q
 
 
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2019

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     
Commission file number: 001-36786
 
 
 RESTAURANT BRANDS INTERNATIONAL INC.
(Exact Name of Registrant as Specified in its Charter)
 
 
 
 
 
 
 
Canada
 
98-1202754
(State or Other Jurisdiction of
 
(I.R.S. Employer
Incorporation or Organization)
 
Identification No.)
 
 
 
 
130 King Street West, Suite 300
 
M5X 1E1
Toronto,
Ontario
 
 
(Address of Principal Executive Offices)
 
(Zip Code)
(905) 845-6511
(Registrant’s telephone number, including area code)
 
Securities registered pursuant to Section 12(b) of the Act:
 
 
 
 
 
Title of each class
 
Trading Symbols
 
Name of each exchange on which registered
Common Shares, without par value
 
QSR
 
New York Stock Exchange
 
 
 
 
Toronto Stock Exchange
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes      No  
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes      No  
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
 
 
 
 
 
 
 
Large accelerated filer
 
  
Accelerated filer
 
 
 
 
 
 
 
 
Non-accelerated filer
 
  
Smaller reporting company
 
 
 
 
 
 
 
 
Emerging growth company
 
 
 
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No  
As of October 24, 2019, there were 298,114,230 common shares of the Registrant outstanding.



Table of Contents

RESTAURANT BRANDS INTERNATIONAL INC. AND SUBSIDIARIES
TABLE OF CONTENTS
 
 
 
 
 
 
Page
 
 
 
 
Item 1.
Item 2.
Item 3.
Item 4.
 
 
 
 
Item 6.
 


2


Table of Contents

PART I — Financial Information
Item 1. Financial Statements
RESTAURANT BRANDS INTERNATIONAL INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(In millions of U.S. dollars, except share data)
(Unaudited)
 
As of
 
September 30,
2019
 
December 31,
2018
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
1,732

 
$
913

Accounts and notes receivable, net of allowance of $16 and $14, respectively
472

 
452

Inventories, net
83

 
75

Prepaids and other current assets
86

 
60

Total current assets
2,373

 
1,500

Property and equipment, net of accumulated depreciation and amortization of $709 and $704, respectively
1,981

 
1,996

Operating lease assets, net
1,147

 

Intangible assets, net
10,439

 
10,463

Goodwill
5,579

 
5,486

Net investment in property leased to franchisees
47

 
54

Other assets, net
683

 
642

Total assets
$
22,249

 
$
20,141

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts and drafts payable
$
510

 
$
513

Other accrued liabilities
797

 
637

Gift card liability
94

 
167

Current portion of long term debt and finance leases (Note 10)
776

 
91

Total current liabilities
2,177

 
1,408

Term debt, net of current portion
11,568

 
11,823

Finance leases, net of current portion
279

 
226

Operating lease liabilities, net of current portion
1,055

 

Other liabilities, net
1,598

 
1,547

Deferred income taxes, net
1,509

 
1,519

Total liabilities
18,186

 
16,523

Shareholders’ equity:
 
 
 
Common shares, no par value; unlimited shares authorized at September 30, 2019 and December 31, 2018; 298,095,767 shares issued and outstanding at September 30, 2019; 251,532,493 shares issued and outstanding at December 31, 2018
2,460

 
1,737

Retained earnings
762

 
674

Accumulated other comprehensive income (loss)
(864
)
 
(800
)
Total Restaurant Brands International Inc. shareholders’ equity
2,358

 
1,611

Noncontrolling interests
1,705

 
2,007

Total shareholders’ equity
4,063

 
3,618

Total liabilities and shareholders’ equity
$
22,249

 
$
20,141


See accompanying notes to condensed consolidated financial statements.

3


Table of Contents

RESTAURANT BRANDS INTERNATIONAL INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(In millions of U.S. dollars, except per share data)
(Unaudited)
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2019
 
2018
 
2019
 
2018
Revenues:
 
 
 
 
 
 
 
Sales
$
624

 
$
609

 
$
1,735

 
$
1,743

Franchise and property revenues
834

 
766

 
2,389

 
2,229

Total revenues
1,458

 
1,375

 
4,124

 
3,972

Operating costs and expenses:
 
 
 
 
 
 
 
Cost of sales
475

 
470

 
1,334

 
1,348

Franchise and property expenses
133

 
107

 
401

 
314

Selling, general and administrative expenses
320

 
298

 
948

 
917

(Income) loss from equity method investments
(11
)
 
(4
)
 
(11
)
 
(17
)
Other operating expenses (income), net
(30
)
 
26

 
(44
)
 
9

Total operating costs and expenses
887

 
897

 
2,628

 
2,571

Income from operations
571

 
478

 
1,496

 
1,401

Interest expense, net
137

 
135

 
406

 
405

Loss on early extinguishment of debt
4

 

 
4

 

Income before income taxes
430

 
343

 
1,086

 
996

Income tax expense
79

 
93

 
232

 
153

Net income
351

 
250

 
854

 
843

Net income attributable to noncontrolling interests (Note 12)
150

 
116

 
376

 
394

Net income attributable to common shareholders
$
201

 
$
134

 
$
478

 
$
449

Earnings per common share
 
 
 
 
 
 
 
Basic
$
0.76

 
$
0.53

 
$
1.85

 
$
1.81

Diluted
$
0.75

 
$
0.53

 
$
1.82

 
$
1.78

Weighted average shares outstanding
 
 
 
 
 
 
 
Basic
267

 
251

 
258

 
249

Diluted
470

 
475

 
469

 
474

See accompanying notes to condensed consolidated financial statements.


4


Table of Contents

RESTAURANT BRANDS INTERNATIONAL INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Comprehensive Income (Loss)
(In millions of U.S. dollars)
(Unaudited)
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2019
 
2018
 
2019
 
2018
Net income
$
351

 
$
250

 
$
854

 
$
843

 
 
 
 
 
 
 
 
Foreign currency translation adjustment
(173
)
 
147

 
185

 
(325
)
Net change in fair value of net investment hedges, net of tax of $(37), $0, $2 and $(38)
143

 
(83
)
 
27

 
33

Net change in fair value of cash flow hedges, net of tax of $9, $7, $43 and $(3)
(25
)
 
24

 
(116
)
 
52

Amounts reclassified to earnings of cash flow hedges, net of tax of $(2), $1, $(3) and $(1)
5

 
8

 
7

 
14

Other comprehensive income (loss)
(50
)
 
96

 
103

 
(226
)
Comprehensive income (loss)
301

 
346

 
957

 
617

Comprehensive income (loss) attributable to noncontrolling interests
129

 
161

 
424

 
288

Comprehensive income (loss) attributable to common shareholders
$
172

 
$
185

 
$
533

 
$
329

See accompanying notes to condensed consolidated financial statements.


5


Table of Contents

RESTAURANT BRANDS INTERNATIONAL INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Shareholders’ Equity
(In millions of U.S. dollars, except shares and per share data)
(Unaudited)
 
Issued Common Shares
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Noncontrolling
Interest
 
Total
 
Shares
 
Amount
 
 
 
 
Balances at December 31, 2018
251,532,493

 
$
1,737

 
$
674

 
$
(800
)
 
$
2,007

 
$
3,618

Cumulative effect adjustment

 

 
12

 

 
9

 
21

Stock option exercises
2,019,620

 
42

 

 

 

 
42

Share-based compensation

 
22

 

 

 

 
22

Issuance of shares
134,809

 
7

 

 

 

 
7

Dividends declared ($0.50 per share)

 

 
(127
)
 

 

 
(127
)
Dividend equivalents declared on restricted stock units

 
2

 
(2
)
 

 

 

Distributions declared by Partnership on Partnership exchangeable units ($0.50 per unit)

 

 

 

 
(104
)
 
(104
)
Exchange of Partnership exchangeable units for RBI common shares
141,190

 
2

 

 
(1
)
 
(1
)
 

Net income

 

 
135

 

 
111

 
246

Other comprehensive income (loss)

 

 

 
26

 
22

 
48

Balances at March 31, 2019
253,828,112

 
$
1,812

 
$
692

 
$
(775
)
 
$
2,044

 
$
3,773

Stock option exercises
1,697,488

 
38

 

 

 

 
38

Share-based compensation

 
17

 

 

 

 
17

Issuance of shares
59,970

 

 

 

 

 

Dividends declared ($0.50 per share)

 

 
(128
)
 

 

 
(128
)
Dividend equivalents declared on restricted stock units

 
2

 
(2
)
 

 

 

Distributions declared by Partnership on Partnership exchangeable units ($0.50 per unit)

 

 

 

 
(103
)
 
(103
)
Exchange of Partnership exchangeable units for RBI common shares
45,325

 
1

 

 

 
(1
)
 

Restaurant VIE contributions (distributions)

 

 

 

 
1

 
1

Net income

 

 
142

 

 
115

 
257

Other comprehensive income (loss)

 

 

 
58

 
47

 
105

Balances at June 30, 2019
255,630,895

 
$
1,870

 
$
704

 
$
(717
)
 
$
2,103

 
$
3,960

Stock option exercises
636,918

 
19

 

 

 

 
19

Share-based compensation

 
17

 

 

 

 
17

Issuance of shares
20,700

 

 

 

 

 

Dividends declared ($0.50 per share)

 

 
(141
)
 

 

 
(141
)
Dividend equivalents declared on restricted stock units

 
2

 
(2
)
 

 

 

Distributions declared by Partnership on Partnership exchangeable units ($0.50 per unit)

 

 

 

 
(92
)
 
(92
)
Exchange of Partnership exchangeable units for RBI common shares
41,807,254

 
552

 

 
(118
)
 
(434
)
 

Restaurant VIE contributions (distributions)

 

 

 

 
(1
)
 
(1
)
Net income

 

 
201

 

 
150

 
351

Other comprehensive income (loss)

 

 

 
(29
)
 
(21
)
 
(50
)
Balances at September 30, 2019
298,095,767

 
$
2,460

 
$
762

 
$
(864
)
 
$
1,705

 
$
4,063

See accompanying notes to condensed consolidated financial statements.

6


Table of Contents


RESTAURANT BRANDS INTERNATIONAL INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Shareholders’ Equity
(In millions of U.S. dollars, except shares and per share data)
(Unaudited)
 
Issued Common Shares
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Noncontrolling
Interest
 
Total
 
Shares
 
Amount
 
 
 
 
Balances at December 31, 2017
243,899,476

 
$
2,052

 
$
651

 
$
(476
)
 
$
2,334

 
$
4,561

Cumulative effect adjustment

 

 
(132
)
 

 
(118
)
 
(250
)
Stock option exercises
5,058,992

 
25

 

 

 

 
25

Share-based compensation

 
14

 

 

 

 
14

Issuance of shares
113,733

 
5

 

 

 

 
5

Dividends declared ($0.45 per share)

 

 
(112
)
 

 

 
(112
)
Distributions declared by Partnership on Partnership exchangeable units ($0.45 per unit)

 

 

 

 
(98
)
 
(98
)
Exchange of Partnership exchangeable units for RBI common shares
29,432

 

 

 

 

 

Restaurant VIE contributions (distributions)

 

 

 

 
1

 
1

Net income

 

 
148

 

 
131

 
279

Other comprehensive income (loss)

 

 

 
(97
)
 
(86
)
 
(183
)
Balances at March 31, 2018
249,101,633

 
$
2,096

 
$
555

 
$
(573
)
 
$
2,164

 
$
4,242

Stock option exercises
410,383

 
4

 

 

 

 
4

Share-based compensation

 
13

 

 

 

 
13

Issuance of shares
12,332

 
1

 

 

 

 
1

Dividends declared ($0.45 per share)

 

 
(112
)
 

 

 
(112
)
Dividend equivalents declared on restricted stock units

 
2

 
(2
)
 

 

 

Distributions declared by Partnership on Partnership exchangeable units ($0.45 per unit)

 

 

 

 
(98
)
 
(98
)
Exchange of Partnership exchangeable units for RBI common shares
42,923

 

 

 

 

 

Net income

 

 
167

 

 
147

 
314

Other comprehensive income (loss)

 

 

 
(74
)
 
(65
)
 
(139
)
Balances at June 30, 2018
249,567,271

 
$
2,116

 
$
608

 
$
(647
)
 
$
2,148

 
$
4,225

Stock option exercises
1,438,979

 
24

 

 

 

 
24

Share-based compensation

 
13

 

 

 

 
13

Issuance of shares
21,123

 

 

 

 

 

Dividends declared ($0.45 per share)

 

 
(114
)
 

 

 
(114
)
Dividend equivalents declared on restricted stock units

 
2

 
(2
)
 

 

 

Distributions declared by Partnership on Partnership exchangeable units ($0.45 per unit)

 

 

 

 
(98
)
 
(98
)
Exchange of Partnership exchangeable units for RBI common shares
92,978

 
2

 

 

 
(2
)
 

Net income

 

 
134

 

 
116

 
250

Other comprehensive income (loss)

 

 

 
51

 
45

 
96

Balances at September 30, 2018
251,120,351

 
$
2,157

 
$
626

 
$
(596
)
 
$
2,209

 
$
4,396

See accompanying notes to condensed consolidated financial statements.

7


Table of Contents

RESTAURANT BRANDS INTERNATIONAL INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(In millions of U.S. dollars)
(Unaudited)
 
Nine Months Ended September 30,
 
2019
 
2018
Cash flows from operating activities:
 
 
 
Net income
$
854

 
$
843

Adjustments to reconcile net income to net cash provided by (used for) operating activities:
 
 
 
Depreciation and amortization
139

 
138

Non-cash loss on early extinguishment of debt
4

 

Amortization of deferred financing costs and debt issuance discount
22

 
22

(Income) loss from equity method investments
(11
)
 
(17
)
(Gain) loss on remeasurement of foreign denominated transactions
(38
)
 
(19
)
Net (gains) losses on derivatives
(43
)
 
(24
)
Share-based compensation expense
56

 
39

Deferred income taxes
(16
)
 
6

Other
1

 
11

Changes in current assets and liabilities, excluding acquisitions and dispositions:
 
 
 
Accounts and notes receivable
(7
)
 
(1
)
Inventories and prepaids and other current assets
(34
)
 
(16
)
Accounts and drafts payable
(15
)
 
(24
)
Other accrued liabilities and gift card liability
(85
)
 
(284
)
Tenant inducements paid to franchisees
(13
)
 
(25
)
Other long-term assets and liabilities
97

 
24

Net cash provided by (used for) operating activities
911

 
673

Cash flows from investing activities:
 
 
 
Payments for property and equipment
(32
)
 
(53
)
Net proceeds from disposal of assets, restaurant closures, and refranchisings
22

 
2

Settlement/sale of derivatives, net
17

 
11

Other investing activities, net

 
12

Net cash provided by (used for) investing activities
7

 
(28
)
Cash flows from financing activities:
 
 
 
Proceeds from issuance of long-term debt
750

 

Repayments of long-term debt and finance leases
(290
)
 
(66
)
Payment of financing costs
(13
)
 

Payment of dividends on common shares and distributions on Partnership exchangeable units
(669
)
 
(517
)
Payments in connection with redemption of preferred shares

 
(60
)
Proceeds from stock option exercises
99

 
53

Proceeds from derivatives
17

 

Other financing activities, net

 
1

Net cash (used for) provided by financing activities
(106
)
 
(589
)
Effect of exchange rates on cash and cash equivalents
7

 
(10
)
Increase (decrease) in cash and cash equivalents
819

 
46

Cash and cash equivalents at beginning of period
913

 
1,097

Cash and cash equivalents at end of period
$
1,732

 
$
1,143

Supplemental cash flow disclosures:
 
 
 
Interest paid
$
433

 
$
411

Income taxes paid
$
171

 
$
374

See accompanying notes to condensed consolidated financial statements.

8


Table of Contents

RESTAURANT BRANDS INTERNATIONAL INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note 1. Description of Business and Organization
Restaurant Brands International Inc. (the “Company”, “RBI”, “we”, “us” or “our”) was formed on August 25, 2014 and continued under the laws of Canada. The Company serves as the sole general partner of Restaurant Brands International Limited Partnership (“Partnership”). We franchise and operate quick service restaurants serving premium coffee and other beverage and food products under the Tim Hortons® brand (“Tim Hortons” or “TH”), fast food hamburgers principally under the Burger King® brand (“Burger King” or “BK”), and chicken under the Popeyes® brand (“Popeyes” or “PLK”). We are one of the world’s largest quick service restaurant, or QSR, companies as measured by total number of restaurants. As of September 30, 2019, we franchised or owned 4,887 Tim Hortons restaurants, 18,232 Burger King restaurants, and 3,192 Popeyes restaurants, for a total of 26,311 restaurants, and operate in more than 100 countries and U.S. territories. Approximately 100% of current system-wide restaurants are franchised.
All references to “$” or “dollars” are to the currency of the United States unless otherwise indicated. All references to “Canadian dollars” or “C$” are to the currency of Canada unless otherwise indicated.
Note 2. Basis of Presentation and Consolidation
We have prepared the accompanying unaudited condensed consolidated financial statements (the “Financial Statements”) in accordance with the rules and regulations of the Securities and Exchange Commission (the “SEC”) for interim financial information. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America (“U.S. GAAP”) for complete financial statements. Therefore, the Financial Statements should be read in conjunction with the audited consolidated financial statements contained in our Annual Report on Form 10-K filed with the SEC and Canadian securities regulatory authorities on February 22, 2019.
The Financial Statements include our accounts and the accounts of entities in which we have a controlling financial interest, the usual condition of which is ownership of a majority voting interest. All material intercompany balances and transactions have been eliminated in consolidation. Investments in other affiliates that are owned 50% or less where we have significant influence are accounted for by the equity method.
We are the sole general partner of Partnership and, as such we have the exclusive right, power and authority to manage, control, administer and operate the business and affairs and to make decisions regarding the undertaking and business of Partnership, subject to the terms of the amended and restated limited partnership agreement of Partnership (the “partnership agreement”) and applicable laws. As a result, we consolidate the results of Partnership and record a noncontrolling interest in our consolidated balance sheets and statements of operations with respect to the remaining economic interest in Partnership we do not hold.
We also consider for consolidation entities in which we have certain interests, where the controlling financial interest may be achieved through arrangements that do not involve voting interests. Such an entity, known as a variable interest entity (“VIE”), is required to be consolidated by its primary beneficiary. The primary beneficiary is the entity that possesses the power to direct the activities of the VIE that most significantly impact its economic performance and has the obligation to absorb losses or the right to receive benefits from the VIE that are significant to it. Our maximum exposure to loss resulting from involvement with VIEs is attributable to accounts and notes receivable balances, outstanding loan guarantees and future lease payments, where applicable.
As our franchise and master franchise arrangements provide the franchise and master franchise entities the power to direct the activities that most significantly impact their economic performance, we do not consider ourselves the primary beneficiary of any such entity that might be a VIE.

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Tim Hortons has historically entered into certain arrangements in which an operator acquires the right to operate a restaurant, but Tim Hortons owns the restaurant’s assets. We perform an analysis to determine if the legal entity in which operations are conducted is a VIE and consolidate a VIE entity if we also determine Tim Hortons is the entity’s primary beneficiary (“Restaurant VIEs”). As of September 30, 2019 and December 31, 2018, we determined that we are the primary beneficiary of 30 and 17 Restaurant VIEs, respectively, and accordingly, have consolidated the results of operations, assets and liabilities, and cash flows of these Restaurant VIEs in our Financial Statements. Material intercompany accounts and transactions have been eliminated in consolidation.
In the opinion of management, all adjustments (consisting of normal recurring adjustments) necessary for a fair presentation have been included in the Financial Statements. The results for interim periods are not necessarily indicative of the results that may be expected for any other interim period or for the full year.
The preparation of consolidated financial statements in conformity with U.S. GAAP and related rules and regulations of the SEC requires our management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and the related disclosure of contingent assets and liabilities. Actual results could differ from these estimates.
Certain prior year amounts in the accompanying Financial Statements and notes to the Financial Statements have been reclassified in order to be comparable with the current year classifications. These consist of the reclassification of $25 million from changes in Other long-term assets and liabilities in the Condensed Consolidated Statement of Cash Flows for the nine months ended September 30, 2018 to Tenant inducements paid to franchisees. These reclassifications had no effect on previously reported net income.
Note 3. New Accounting Pronouncements
Lease Accounting – In February 2016, the Financial Accounting Standard Board (the “FASB”) issued new guidance on leases. We adopted this new guidance on January 1, 2019. See Note 4, Leases, for further information about our transition to this new lease accounting standard.
Goodwill Impairment – In January 2017, the FASB issued guidance to simplify how an entity measures goodwill impairment by removing the second step of the two-step quantitative goodwill impairment test. An entity will no longer be required to perform a hypothetical purchase price allocation to measure goodwill impairment. Instead, impairment will be measured at the amount by which the carrying value exceeds the fair value of a reporting unit; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. The amendment requires prospective adoption and is effective commencing in 2020 with early adoption permitted. The adoption of this new guidance will not have a material impact on our Financial Statements.
Reclassification of Certain Tax Effects – In February 2018, the FASB issued guidance which allows a reclassification from accumulated other comprehensive income (loss) to retained earnings for the tax effects of certain items within accumulated other comprehensive income (loss). The amendment is effective commencing in 2019 with early adoption permitted. The adoption of this new guidance did not have a material impact on our Financial Statements.
Share-based payment arrangements with nonemployees – In June 2018, the FASB issued guidance which simplifies the accounting for share-based payments granted to nonemployees for goods and services. Most of the guidance on such payments to nonemployees would be aligned with the requirements for share-based payments granted to employees. The amendment is effective commencing in 2019 with early adoption permitted. The adoption of this new guidance did not have a material impact on our Financial Statements.


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Note 4. Leases
As of September 30, 2019, we leased or subleased 5,294 restaurant properties to franchisees and 183 non-restaurant properties to third parties under operating leases and direct financing leases where we are the lessor. Initial lease terms generally range from 10 to 20 years. Most leases to franchisees provide for fixed monthly payments and many provide for future rent escalations and renewal options. Certain leases also include provisions for variable rent, determined as a percentage of sales, generally when annual sales exceed specified levels. Lessees typically bear the cost of maintenance, insurance and property taxes.
We lease land, buildings, equipment, office space and warehouse space. Land and building leases generally have an initial term of 10 to 30 years, while land-only lease terms can extend longer, and most leases provide for fixed monthly payments. Many of these leases provide for future rent escalations and renewal options. Certain leases also include provisions for variable rent payments, determined as a percentage of sales, generally when annual sales exceed specified levels. Most leases also obligate us to pay, as lessee, the cost of maintenance, insurance and property taxes.
We transitioned to FASB Accounting Standards Codification (“ASC”) Topic 842, Leases (“ASC 842”), from ASC Topic 840, Leases (the “Previous Standard”) on January 1, 2019 on a modified retrospective basis using the effective date transition method. Our Financial Statements reflect the application of ASC 842 guidance beginning in 2019, while our consolidated financial statements for prior periods were prepared under the guidance of the Previous Standard. The new guidance requires lessees to recognize on the balance sheet the assets and liabilities for the rights and obligations created by finance and operating leases with lease terms of more than 12 months, amends various other aspects of accounting for leases by lessees and lessors, and requires enhanced disclosures. Our transition to ASC 842 resulted in the gross presentation of property tax and maintenance expenses and related lessee reimbursements as franchise and property expenses and franchise and property revenues, respectively. These expenses and reimbursements were presented on a net basis under the Previous Standard.
In connection with our transition to ASC 842, we elected the package of practical expedients under which we did not reassess the classification of our existing leases, reevaluate whether any expired or existing contracts are or contain leases or reassess initial direct costs under the new guidance. We also elected lessee and lessor practical expedients to not separate non-lease components comprised of maintenance from lease components for real estate leases that commenced prior to our transition to ASC 842, as well as for leases that commence or that are modified subsequent to our transition to ASC 842. We did not elect the practical expedient that permitted a reassessment of lease terms for existing leases.



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Financial Statement Impact of Transition to ASC 842
Transition Impact on January 1, 2019 Condensed Consolidated Balance Sheet
Our transition to ASC 842 represents a change in accounting principle. The $21 million cumulative effect of our transition to ASC 842 is reflected as an adjustment to January 1, 2019 Shareholders' equity.
Our transition to ASC 842 resulted in the following adjustments to our condensed consolidated balance sheet as of January 1, 2019 (in millions):
 
As Reported
 
Total
 
Adjusted
 
December 31, 2018
 
Adjustments
 
January 1, 2019
ASSETS
 
 
 
 
 
Current assets:
 
 
 
 
 
Cash and cash equivalents
$
913

 
$

 
$
913

Accounts and notes receivable, net
452

 

 
452

Inventories, net
75

 

 
75

Prepaids and other current assets
60

 

 
60

Total current assets
1,500

 

 
1,500

Property and equipment, net
1,996

 
26

(a)
2,022

Operating lease assets, net

 
1,143

(b)
1,143

Intangible assets, net
10,463

 
(133
)
(c)
10,330

Goodwill
5,486

 

 
5,486

Net investment in property leased to franchisees
54

 

 
54

Other assets, net
642

 

 
642

Total assets
$
20,141

 
$
1,036

 
$
21,177

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
 
 
Current liabilities:
 
 
 
 
 
Accounts and drafts payable
$
513

 
$

 
$
513

Other accrued liabilities
637

 
114

(d)
751

Gift card liability
167

 

 
167

Current portion of long term debt and finance leases
91

 

 
91

Total current liabilities
1,408

 
114

 
1,522

Term debt, net of current portion
11,823

 
(65
)
(e)
11,758

Finance leases, net of current portion
226

 
62

(e)
288

Operating lease liabilities, net of current portion

 
1,028

(f)
1,028

Other liabilities, net
1,547

 
(132
)
(g)
1,415

Deferred income taxes, net
1,519

 
8

(h)
1,527

Total liabilities
16,523

 
1,015

 
17,538

Shareholders’ equity:
 
 
 
 
 
Common shares
1,737

 

 
1,737

Retained earnings
674

 
12

(i)
686

Accumulated other comprehensive income (loss)
(800
)
 

 
(800
)
Total RBI shareholders’ equity
1,611

 
12

 
1,623

Noncontrolling interests
2,007

 
9

(i)
2,016

Total shareholders’ equity
3,618

 
21

 
3,639

Total liabilities and shareholders’ equity
$
20,141

 
$
1,036

 
$
21,177

(a)
Represents the net change in assets recorded in connection with build-to-suit leases.
(b)
Represents the capitalization of operating lease right-of-use (“ROU”) assets equal to the amount of recognized operating lease liability, adjusted by the net carrying amounts of related favorable lease assets and unfavorable lease liabilities in which we are the lessee and straight-line rent accruals, which were reclassified to operating lease ROU assets.

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(c)
Represents the net carrying amount of favorable lease assets associated with leases in which we are the lessee, which have been reclassified to operating lease ROU assets.
(d)
Represents the current portion of operating lease liabilities.
(e)
Represents the net change in liabilities recorded in connection with build-to-suit leases.
(f)
Represents the recognition of operating lease liabilities, net of current portion.
(g)
Represents the net carrying amount of unfavorable lease liabilities associated with leases in which we are the lessee and $64 million of straight-line rent accruals which have been reclassified to operating lease ROU assets.
(h)
Represents the net tax effects of the adjustments noted above, with a corresponding adjustment to shareholders’ equity.
(i)
Represents net change in assets and liabilities recorded in connection with built-to-suit leases and the tax effects of adjustments noted above.
Changes to Lease Accounting Significant Accounting Policies Under ASC 842
In all leases, whether we are the lessor or lessee, we define lease term as the noncancellable term of the lease plus any renewals covered by renewal options that are reasonably certain of exercise based on our assessment of the economic factors relevant to the lessee. The noncancellable term of the lease commences on the date the lessor makes the underlying property in the lease available to the lessee, irrespective of when lease payments begin under the contract.