NOTE A

– SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

J & J Snack Foods Corp. and Subsidiaries (the Company) manufactures, markets and distributes a variety of nutritional snack foods and beverages to the food service and retail supermarket industries. A summary of the significant accounting policies consistently applied in the preparation of the accompanying consolidated financial statements follows. Our

2017

fiscal year comprises

weeks. All references to

2017

fiscal year refer to that

week period. Fiscal years

2016

and

2015

comprised

weeks.

Principles of Consolidation

The consolidated financial statements were prepared in accordance with U.S. GAAP. These financial statements include the accounts of J & J Snack Foods Corp. and its wholly-owned subsidiaries. Intercompany balances and transactions have been eliminated in the consolidated financial statements.

Revenue Recognition

We recognize revenue from our products when the products are shipped to our customers. Repair and maintenance equipment service revenue is recorded when it is performed provided the customer terms are that the customer is to be charged on a time and material basis or on a straight-line basis over the term of the contract when the customer has signed a service contract. Revenue is recognized only where persuasive evidence of an arrangement exists, our price is fixed or estimable and collectability is reasonably assured. We record offsets to revenue for allowances, end-user pricing adjustments, trade spending, coupon redemption costs and returned product. Customers generally do

not

have the right to return product unless it is damaged or defective. Our recorded liability for allowances, end-user pricing adjustments and trade spending was approximately

$13.0

million at

September 30, 2017

and

$14.3

million at

September 24, 2016.

All amounts billed to customers related to shipping and handling are classified as revenues. Our product costs include amounts for shipping and handling, therefore, we charge our customers shipping and handling fees at the time the products are shipped or when services are performed. The cost of shipping products to the customer is recognized at the time the products are shipped to the customer and our policy is to classify them as Distribution expenses. The cost of shipping products to the customer classified as Distribution expenses was

$81,824,000,

$73,114,000

and

$74,158,000

for the fiscal years ended

2017,

2016

and

2015,

respectively.

During the years ended

September 30, 2017,

September 24, 2016

and

September 26, 2015,

we sold

$23,489,000,

$24,664,000

and

$25,536,000,

respectively, of repair and maintenance service contracts in our frozen beverage business. At

September 30, 2017

and

September 24, 2016,

deferred income on repair and maintenance service contracts was

$1,956,000

and

$1,671,000,

respectively, of which

$210,000

and

$145,000

is included in other long-term liabilities as of

September 30, 2017

and

September 24, 2016,

respectively and the balance is reflected as short-term and included in accrued liabilities on the consolidated balance sheet. Repair and maintenance service contract income of

$23,204,000,

$24,571,000

and

$25,534,000

was recognized for the fiscal years ended

2017,

2016

and

2015,

respectively.

Foreign Currency

Assets and liabilities in foreign currencies are translated into U.S. dollars at the rate of exchange prevailing at the balance sheet date. Revenues and expenses are translated at the average rate of exchange for the period. The cumulative translation adjustment is recorded as a separate component of stockholders’ equity and changes to such are included in comprehensive income.

Use of Estimates

In preparing financial statements in conformity with accounting principles generally accepted in the United States of America, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Cash Equivalents

Cash equivalents are short-term, highly liquid investments with original maturities of

three

months or less.

Concentration

s and related risks

We maintain cash balances at financial institutions located in various states. We have cash balances at

two

banks totaling approximately

$45

million that is in excess of FDIC insurance of

$250,000

per bank.

Financial instruments that could potentially subject us to concentrations of credit risk are trade accounts receivable; however, such risks are limited due to the large number of customers comprising our customer base and their dispersion across geographic regions. We usually have approximately

customers with accounts receivable balances of between

million and

$10

million.

We have several large customers that account for a significant portion of our sales. Our top

ten

customers accounted for

42%,

42%

and

43%

of our sales during fiscal years

2017,

2016

and

2015,

respectively, with our largest customer accounting for

of our sales in

2017,

of our sales in

2016

and

of our sales in

2015.

Three of the

ten

customers are food distributors who sell our product to many end users.

About

28%

of our employees are covered by collective bargaining agreements.

None

of our vendors supplied more than

10%

of our ingredients and packaging in

2017,

2016

2015.

Virtually all of our accounts receivable are due from trade customers. Credit is extended based on evaluation of our customers’ financial condition and collateral is

not

required. Accounts receivable payment terms vary and are stated in the financial statements at amounts due from customers net of an allowance for doubtful accounts. At

September 30, 2017

and

September 24, 2016,

our accounts receivables were

$124,553,000

and

$98,325,000

net of an allowance for doubtful accounts of

$359,000

and

$571,000.

Accounts receivable outstanding longer than the payment terms are considered past due. We determine our allowance by considering a number of factors, including the length of time trade accounts receivable are past due, our previous loss history, customers’ current ability to pay their obligations to us, and the condition of the general economy and the industry as a whole. We write off accounts receivable when they become uncollectible, and payments subsequently received on such receivables are credited to the allowance for doubtful accounts.

Inventories

Inventories are valued at the lower of cost (determined by the

first

-in,

first

-out method) or market.

We recognize abnormal amounts of idle facilities, freight, handling costs, and spoilage as charges of the current period. Additionally, we allocate fixed production overhead to inventories based on the normal capacity of our production facilities. We calculate normal capacity as the production expected to be achieved over a number of periods or seasons under normal circumstances, taking into account the loss of capacity resulting from planned maintenance. This requires us to use judgment to determine when production is outside the range of expected variation in production (either abnormally low or abnormally high). In periods of abnormally low production (for example, periods in which there is significantly lower demand, labor and material shortages exist, or there is unplanned equipment downtime) the amount of fixed overhead allocated to each unit of production is

not

increased. However, in periods of abnormally high production the amount of fixed overhead allocated to each unit of production is decreased to assure inventories are

not

measured above cost.

Investment Securities

We classify our investment securities in

one

three

categories: held to maturity, trading, or available for sale. Our investment portfolio at

September 30, 2017,

consists of investments classified as held to maturity and available for sale. The securities that we have the positive intent and ability to hold to maturity are classified as held to maturity and are stated at amortized cost. Investments classified as available for sale are reported at fair market value with unrealized gains and losses related to the changes in fair value of the securities recognized in accumulated other comprehensive income (loss).

The mutual funds and preferred stock in our available for sale portfolio do

not

have contractual maturities; however, we classify them as long term assets as it is our intent to hold them for a period of over

one

year, although we

may

sell some or all of them depending on presently unanticipated needs for liquidity or market conditions. See Note C for further information on our holdings of investment securities.

Depreciation and Amortization

Depreciation of equipment and buildings is provided for by the straight-line method over the assets’ estimated useful lives. We review our equipment and buildings to ensure that they provide economic benefit and are

not

impaired.

Amortization of improvements is provided for by the straight-line method over the term of the lease or the assets’ estimated useful lives, whichever is shorter. Licenses and rights, customer relationships and non-compete agreements are being amortized by the straight-line method over periods ranging from

years and amortization expense is reflected throughout operating expenses.

Long-lived assets, including fixed assets and amortizing intangibles, are reviewed for impairment as events or changes in circumstances occur indicating that the carrying amount of

the asset

may

not

be recoverable. Indefinite lived intangibles are reviewed annually for impairment. Cash flow and sales analyses are used to assess impairment. The estimates of future cash flows and sales involve considerable management judgment and are based upon assumptions about expected future operating performance. Assumptions used in these forecasts are consistent with internal planning. The actual cash flows and sales could differ from management’s estimates due to changes in business conditions, operating performance, economic conditions, competition and consumer preferences.

10.

Fair Value of Financial Instruments

The carrying value of our short-term financial instruments, such as accounts receivables and accounts payable, approximate their fair values, based on the short-term maturities of these instruments.

11.

Income Taxes

We account for our income taxes under the liability method. Under the liability method, deferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities as measured by the enacted tax rates that will be in effect when these differences reverse. Deferred tax expense is the result of changes in deferred tax assets and liabilities.

Additionally, we recognize a liability for income taxes and associated penalties and interest for tax positions taken or expected to be taken in a tax return which are more likely than

not

to be overturned by taxing authorities (“uncertain tax positions”).

We have

not

recognized a tax benefit in our financial statements for these uncertain tax positions.

As of

September 30, 2017

and

September 24, 2016,

the total amount of gross unrecognized tax benefits is

$374,000

and

$354,000;

respectively, all of which would impact our effective tax rate over time, if recognized. We recognize interest and penalties related to income tax matters as a part of the provision for income taxes. We had

$239,000

of accrued interest and penalties as of

September 30, 2017

and

$219,000

as of

September 24, 2016.

We did

not

recognize any penalties and interest resulting from tax settlements in the years ended

September 30, 2017

and

September 24, 2016.

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:

	(in thousands)

Balance at September 24, 2016	$	354
Additions based on tax positions related to the current year		20
Reductions for tax positions of prior years		-
Settlements		-
Balance at September 30, 2017	$	374

In addition to our federal tax return and tax returns for Mexico and Canada, we file tax returns in all states that have a corporate income tax. Virtually all the returns noted above are open for examination for

three

four

years.

12.

Earnings Per Common Share

Basic earnings per common share (EPS) excludes dilution and is computed by dividing income available to common shareholders by the weighted average common shares outstanding during the period. Diluted EPS takes into consideration the potential dilution that could occur if securities (stock options) or other contracts to issue common stock were exercised and converted into common stock.

Our calculation of EPS is as follows:

	Fiscal Year Ended September 30, 2017
	Income		Shares		Per Share
	(Numerator)		(Denominator)		Amount
	(in thousands, except per share amounts)

Earnings Per Basic Share
Net Income available to common stockholders	$	79,174		18,707	$	4.23

Effect of Dilutive Securities
Options		-		109		(0.02	)

Earnings Per Diluted Share
Net Income available to common stockholders plus assumed conversions	$	79,174		18,816	$	4.21

157,994

anti-dilutive shares have been excluded in the computation of

2017

diluted EPS.

	Fiscal Year Ended September 24, 2016
	Income		Shares		Per Share
	(Numerator)		(Denominator)		Amount
	(in thousands, except per share amounts)

Earnings Per Basic Share
Net Income available to common stockholders	$	75,975		18,649	$	4.07

Effect of Dilutive Securities
Options		-		120		(0.02	)

Earnings Per Diluted Share
Net Income available to common stockholders plus assumed conversions	$	75,975		18,769	$	4.05

180,170

anti-dilutive shares have been excluded in the computation of

2016

diluted EPS.

	Fiscal Year Ended September 26, 2015
	Income		Shares		Per Share
	(Numerator)		(Denominator)		Amount
	(in thousands, except per share amounts)

Earnings Per Basic Share
Net Income available to common stockholders	$	70,183		18,685	$	3.76

Effect of Dilutive Securities
Options		-		134		(0.03	)

Earnings Per Diluted Share
Net Income available to common stockholders plus assumed conversions	$	70,183		18,819	$	3.73

1,500

anti-dilutive shares have been excluded in the computation of

2015

diluted EPS.

13.

Accounting for Stock-Based Compensation

September 30, 2017,

the Company has

three

stock-based employee compensation plans. Share-based compensation was recognized as follows:

	Fiscal year ended
	September 30,			September 24,		September 26,
	2017			2016		2015
	(in thousands)

Stock options	$	(436	)	$	86	$	1,098
Stock purchase plan		363			305		328
Stock issued to an outside director		56			-		-
Restricted stock issued to employees		4			4		6
Total share-based compensation	$	(13	)	$	395	$	1,432

The above compensation is net of tax benefits	$	3,061		$	1,980	$	734

Income tax benefit related to share-based compensation for the years ended

September 30, 2017

and

September 24, 2016

includes

$1,497,000

and

$885,000,

respectively, as a result of our early adoption as of our fiscal

March 2016

quarter of Accounting Standards Update

2016

09,

Improvements to Employee Share-Based Payment Accounting. Under this new standard, income tax benefit is recognized rather than additional paid in capital upon the exercise of stock options.

September 30, 2017,

the Company has unrecognized compensation expense of approximately

$4.0

million to be recognized over the next

three

fiscal years.

The fair value of each option grant is estimated on the date of grant using the Black-Scholes options-pricing model with the following weighted average assumptions used for grants in fiscal

2017,

2016

and

2015:

expected volatility of

16.6%

for fiscal year

2017,

expected volatility of

16.7%

for fiscal year

2016

and

18.4%

for fiscal year

2015:

weighted average risk-free interest rates of

2.0%,

1.3%

and

1.7%;

dividend rate of

1.3%,

1.4%

and

1.4%

and expected lives ranging

between

and

years for all years. An expected forfeiture rate of

13%

was used for

2017,

19%

was used for

2016

and

19%

was used for

2015.

Expected volatility is based on the historical volatility of the price of our common shares over the past

months for

year options and

years for

year options. We use historical information to estimate expected life and forfeitures within the valuation model. The expected term of awards represents the period of time that options granted are expected to be outstanding. The risk-free rate for periods within the expected life of the option is based on the U.S. Treasury yield curve in effect at the time of grant. Compensation cost is recognized using a straight-line method over the vesting or service period and is net of estimated forfeitures.

14.

Advertising Costs

Advertising costs are expensed as incurred. Total advertising expense was

$5,677,000,

$4,870,000

and

$4,290,000

for the fiscal years

2017,

2016

and

2015,

respectively.

15.

Commodity Price Risk Management

Our most significant raw material requirements include flour, packaging, shortening, corn syrup, sugar, juice, cheese, chocolate, and a variety of nuts. We attempt to minimize the effect of future price fluctuations related to the purchase of raw materials primarily through forward purchasing to cover future manufacturing requirements, generally for periods from

months. As of

September 30, 2017,

we have approximately

$75

million of such commitments. Futures contracts are

not

used in combination with forward purchasing of these raw materials. Our procurement practices are intended to reduce the risk of future price increases, but also

may

potentially limit the ability to benefit from possible price decreases. Our policy is to recognize estimated losses on purchase commitments when they occur. At each of the last

three

fiscal year ends, we did

not

have any material losses on our purchase commitments.

16.

Research and Development Costs

Research and development costs are expensed as incurred. Total research and development expense was

$674,000,

$525,000

and

$506,000

for the fiscal years

2017,

2016

and

2015,

respectively.

17.

Recent Accounting Pronouncements

May

2014

and in subsequent updates, the FASB issued guidance on revenue recognition which requires that we recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration which we expect to be entitled in exchange for those goods or services. We have performed a review of the requirements of the new revenue standard and are in the process of reviewing customer contracts and applying the

five

-step model of this new guidance to each contract category we have identified and will compare the results to our current accounting practices. We plan to adopt this guidance on the

first

day of our fiscal

2019

year. We will likely apply the modified retrospective transition method, which would result in an adjustment to retained earnings for the cumulative effect, if any, of applying the standard to contracts in process as of the adoption date. Under this method, we would

not

restate the prior financial statements presented. Therefore, this guidance would require additional disclosures of the amount by which each financial statement line item is affected in the fiscal year

2019

reporting period.

January 2016,

the FASB issued guidance which requires an entity to measure equity investments at fair value with changes in fair value recognized in net income , to use the price that would be received by a seller when measuring the fair value of financial instruments for disclosure purposes, and which eliminates the requirement to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet. Under present guidance, changes in fair value of equity investments available for sale are recognized in Stockholders’ Equity. This guidance is effective for our fiscal year ended

September 2019.

Early adoption is

not

permitted. We anticipate that the adoption of this guidance on our consolidated financial statements will

not

be material.

February 2016,

the FASB issued guidance on lease accounting which requires that an entity recognize most leases on its balance sheet.

The guidance retains a dual lease accounting model for purposes of income statement recognition, continuing the distinction between what are currently known as “capital” and “operating” leases for lessees. This guidance is effective for our fiscal year ended

September 2020.

While we continue to evaluate the effect of adopting this guidance on our consolidated financial statements and related disclosures, we expect our operating leases, as disclosed in Note J — Commitments and Contingencies, will be subject to the new standard. We will recognize right-of-use assets and operating lease liabilities on our consolidated balance sheets upon adoption, which will increase our total assets and liabilities.

March 2016,

the FASB issued guidance on share based compensation which requires that an entity recognize all excess tax benefits and tax

deficiencies as income tax expense or benefit in the income statement as discrete items in the reporting period in which they occur. Under current guidance, excess tax benefits are

recognized in additional paid-in capital and tax deficiencies are recognized either as an offset to accumulated excess tax benefits, or in the income statement. This guidance is effective for our fiscal year ended

September 2018.

Early adoption is permitted. See Note

A.13

to these financial statements for a discussion of the impact the adoption of this guidance in our

March 2016

quarter had on our consolidated financial statements.

January 2017,

the FASB issued guidance to clarify the definition of a business. The updated standard provides guidance to assist entities with evaluating when a set of transferred assets and activities is a business. Under the new guidance, an entity

first

determines whether substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or a group of similar identifiable assets. If this threshold is met, the set is

not

a business. If it is

not

met, the entity then evaluates whether the set meets the requirements that a business include,

at a minimum, an input and a substantive process that together significantly contribute to the ability to create outputs. The updated guidance is effective for our fiscal year ending

September 2019

and interim periods within that year. Early adoption is permitted, including the interim and annual periods in which the financial statements have

not

been issued or made available for issuances. We have adopted this new guidance in the

March 2017

quarter and the adoption had

impact on our consolidated financial statements.

January 2017,

the FASB issued guidance

to simplify the test for goodwill impairment. This updated standard simplifies the subsequent measurement of goodwill and eliminates the

two

-step goodwill impairment test. Under the new guidance, an annual or interim goodwill impairment test is performed by comparing the fair value of a reporting unit with its carrying amount, and an impairment charge is recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value. The guidance also eliminates the requirements for any reporting unit with a

zero

or negative carrying amount to perform a qualitative assessment and

two

-step goodwill impairment test. The updated guidance is effective for our fiscal year ending

September 2021

and interim periods within that year. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after

January 1, 2017.

The adoption of this new guidance in our

September 2017

quarter did

not

have a material impact on our consolidated financial statements.

18.

Reclassifications

Certain prior year financial statement amounts have been reclassified to be consistent with the presentation for the current year.