Shake Shack 2016 Annual Report Download - page 82

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Table of Contents
Once a domestic company-operated Shack opens, we record the straight-line rent expense and any contingent rent, if applicable, in occupancy and related expenses
on the Consolidated Statements of Income (Loss).
Many of our leases also require us to pay real estate taxes, common area maintenance costs and other occupancy costs which are included in occupancy and related
expenses on the Consolidated Statements of Income (Loss).
We expend cash for leasehold improvements to build out and equip our leased premises. We may also expend cash for structural additions made to leased
premises. Generally, a portion of the leasehold improvements and building costs are reimbursed by our landlords as landlord incentives pursuant to agreed-upon
terms in our lease agreements. If obtained, landlord incentives usually take the form of up-front cash, full or partial credits against our future minimum or
contingent rents otherwise payable by us, or a combination thereof. When contractually due, we classify landlord incentives as deferred rent on the Consolidated
Balance Sheets and amortize the landlord incentives on a straight-line basis over the lease term as a reduction of occupancy costs and related expenses or pre-
opening costs on the Consolidated Statements of Income (Loss) .
Revenue Recognition
Revenue consists of Shack sales and licensing revenue. Revenue from Shack sales are presented net of discounts and recognized when food and beverage products
are sold. Sales tax collected from customers is excluded from Shack sales and the obligation is included in sales tax payable until the taxes are remitted to the
appropriate taxing authorities. Revenue from our gift cards are deferred and recognized upon redemption. Licensing revenues include initial territory fees and
ongoing licensing fees from all licensed Shacks. Initial territory fees are recorded as deferred revenue when received and proportionate amounts are recognized as
revenue when a licensed Shack is opened and all material services and conditions related to the fee have been substantially performed. Ongoing licensing fees from
these Shacks are based on a percentage of sales and are recognized as revenue as the fees are earned and become receivable from the licensee.
Income Taxes
We account for income taxes pursuant to the asset and liability method which requires the recognition of deferred income tax assets and liabilities related to the
expected future tax consequences arising from temporary differences between the carrying amounts and tax bases of assets and liabilities based on enacted
statutory tax rates applicable to the periods in which the temporary differences are expected to reverse. Any effects of changes in income tax rates or laws are
included in income tax expense in the period of enactment. A valuation allowance is recognized if we determine it is more likely than not that all or a portion of a
deferred tax asset will not be recognized.
Pre-Opening Costs
Pre-opening costs are expensed as incurred and consist primarily of legal fees, occupancy, manager and employee wages, travel and related training costs incurred
prior to the opening of a Shack.
Advertising
The cost of advertising and promotions are expensed as incurred. Advertising and promotions costs amounted to $1,646 , $1,166 and $794 in fiscal 2015 , 2014
and 2013 , respectively, and are included in general and administrative expense and other operating expenses on the Consolidated Statements of Income (Loss).
Recently Adopted Accounting Pronouncements
In November 2015, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update No. 2015-17, Balance Classification of Deferred
Taxes ("ASU 2015-17"). ASU 2015-17 requires deferred tax liabilities and assets be classified as non-current in a classified statement of financial position. ASU
2015-17 is effective for reporting periods after December 15, 2016 and may be adopted either retrospectively or prospectively. Early adoption is permitted and we
elected to early adopt this guidance as of December 30, 2015 and to apply the guidance retrospectively to all periods presented. Accordingly, we reclassified the
prior period amount of $20 related to our deferred tax asset from current to non-current, resulting in an increase to the non-current deferred
Shake Shack Inc. Form 10-K | 80