NOTE C – Recently Adopted Accounting Standards

ASU 2014-09

On January 1, 2018, we adopted ASU 2014-09, Revenue - Revenue from Contracts with Customers (ASC Topic 606 or “the new standard”). The new standard requires a company to recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration the company expects to receive in exchange for those goods or services.

We sell home furnishings and recognize revenue at delivery. Havertys does not have a loyalty program or sell gift certificates. We also do not offer coupons for redemption for future purchases, such as those that other retailers might issue for general marketing purposes or for those issued based in conjunction with prior purchases.

The product protection plan we offer is handled by a third-party and we have no performance obligation or inventory risk associated with this service. Havertys is acting as an agent for these sales and records this revenue at the time the covered products are delivered to the customer.

Estimated refunds for returns and allowances are recorded based on estimated margin using our historical return patterns. Under the new standard, we record estimated refunds for sales returns on a gross basis rather than on a net basis. The standard requires the carrying value of the return asset to be presented separately from inventory and subject to impairment testing on its own, separately from inventory on hand. At June 30, 2018, the estimated return inventory was $0.8 million and is included in the line item “Other current assets” and the estimated refund liability was $2.0 million and is included in the line item “Accrued liabilities” on the Condensed Consolidated Balance Sheets.

We record customer deposits when payments are received in advance of the delivery of merchandise, which totaled $29.4 million and $27.8 million at June 30, 2018 and December 31, 2017, respectively. Of the customer deposit liabilities at December 31, 2017, approximately $27.5 million was recognized through net sales in the six months ended June 30, 2018.

We adopted ASU 2014-09 using the modified retrospective method. Results for reporting periods beginning after January 1, 2018 are presented under the new standard, while prior period amounts are not adjusted and continue to be reported in accordance with our historic accounting. We expect the impact of the adoption of the new standard to be immaterial to our net income on an ongoing basis. The cumulative effect of the changes made to our consolidated January 1, 2018 balance sheet for the adoption of the new revenue standard were as follows (in thousands):

	Balance at December 31, 2017		Adjustments Due to ASU 2014-09			Balance at January 1, 2018
Balance Sheet
Assets
Estimated to be returned inventory	$	—	$	786		$	786
Deferred income taxes		12,375		(44	)		12,331

Liabilities
Refund on estimated returns and allowances		—		2,072			2,072
Reserve for cancelled sales and allowances		1,463		(1,463	)		—

Equity
Retained earnings		287,390		133			287,523

Upon adoption of ASC Topic 606, we adopted the following policy elections and practical expedients:

Our contracts are similar as to customer types, deliverables, timing of transfer of goods and other characteristics and we elected to use the portfolio method in accounting for our contracts.

We exclude from revenue amounts collected from customers for sales tax.

We finance less than 1% of sales. We do not adjust the promised amount of consideration for the effects of a significant financing component since receivables from financed sales are paid within one year of delivery.

We expense sales commissions within SG&A at the time revenue is recognized because the amortization period would be one year or less.

We do not disclose the value of unsatisfied performance obligations because delivery is made within one year of the customer purchase.

The following table presents the differences resulting from the adoption of ASC Topic 606 on line items in our condensed consolidated balance sheet. The impact of the adoption on line items in our other financial statements was not material.

	June 30, 2018
(in thousands)	As Reported		Balances Without Adoption of ASC 606		Effect of Change Higher/(Lower)
Balance Sheet
Assets
Estimated to be returned inventory (included in other current assets)		769		—		769
Deferred income taxes		12,648		12,692		(44	)
Liabilities
Refund on estimated returns and allowances (included in other current liabilities)		2,026		—		2,026
Reserve for cancelled sales and allowances (included in other current liabilities)		—		1,437		(1,437	)
Equity
Retained Earnings		292,465		292,329		136

The following table presents our revenues disaggregated by revenue source.

	Three Months Ended June 30,										Six Months Ended June 30,
	2018					2017					2018					2017
(In thousands)	Net Sales		% of Net Sales			Net Sales		% of Net Sales			Net Sales		% of Net Sales			Net Sales		% of Net Sales
Merchandise:
Case Goods
Bedroom Furniture	$	33,550		16.9	%	$	32,055		16.3	%	$	64,665		16.2	%	$	64,021		16.1	%
Dining Room Furniture		22,121		11.1			22,268		11.3			43,755		11.0			43,680		11.0
Occasional		17,044		8.6			17,849		9.1			35,502		8.9			37,053		9.3
		72,715		36.6			72,172		36.7			143,922		36.1			144,754		36.4
Upholstery		78,472		39.5			79,666		40.5			160,269		40.3			161,791		40.7
Mattresses		21,350		10.7			21,514		10.9			41,029		10.3			42,756		10.8
Accessories and Other ⁽¹⁾		26,238		13.2			23,477		11.9			52,998		13.3			47,956		12.1
	$	198,775		100.0	%	$	196,829		100.0	%	$	398,218		100.0	%	$	397,257		100.0	%

(1)

Includes delivery charges and product protection.

ASU 2016-18

We adopted ASU 2016-18, Statement of Cash Flows (ASC Topic 230): Restricted Cash (a consensus of the FASB Emerging Issues Task Force) on January 1, 2018 using the required retrospective transition method. This ASU requires companies to include amounts generally described as restricted cash and restricted cash equivalents in cash and cash equivalents when reconciling beginning-of-period and end-of-period total amounts shown on the statement of cash flows.

Our restricted cash equivalents are funds used to collateralize a portion of our workers’ compensation obligations as required by our insurance carrier. These escrowed funds are shown as restricted cash and cash equivalents on our balance sheets and are investments in money market funds held by an agent. The annual agreement with our carrier governing these funds expires on December 31, 2018.

The following table provides a reconciliation of cash, cash equivalents, and restricted cash equivalents reported within the balance sheet that sum to the total of the same such amounts shown in the statements of cash flows.

	June 30, 2018			December 31, 2017			June 30, 2017		December 31, 2016
(In thousands)	(Unaudited)						(Unaudited)
Cash and cash equivalents		$	74,643		$	79,491	$	65,858	$	63,481
Restricted cash equivalents			8,179			8,115		8,065		8,034
Total cash, cash equivalents and restricted cash equivalents		$	82,822		$	87,606	$	73,923	$	71,515