Working Draft: Gaming Revenue Recognition Implementation Issue. Financial Reporting Center Revenue Recognition

Transcription

1 February 1, 2018 Financial Reporting Center Revenue Recognition Working Draft: Gaming Revenue Recognition Implementation Issue Issue #6-13 Disclosures Contract with Customers Expected Overall Level of Impact to Industry Accounting: Significant Wording to be Included in the Revenue Recognition Guide: 1. The guidance provided in this section addresses the new disclosure requirements under FASB ASC for public entities. Gaming companies that are neither a public business entity nor a not-for-profit entity that has issued, or is a conduit bond obligor for, securities that are traded, listed, or quoted on an exchange or an overthe-counter market, may elect not to provide certain of the disclosures required of public entities. These differences are described further in each of the sections below. Disaggregation of Revenue 2. As discussed in BC335 of FASB ASU , the intention of the disaggregation of revenue disclosure as outlined in FASB ASC is to provide users of the financial statements with additional insight into the composition of a company s revenues that depict how the nature, amount, timing, and uncertainty of revenue and cash flows are affected by economic factors. This may be most effectively achieved by providing disaggregated disclosures based on risk profile. Companies in the gaming industry may wish to consider whether the categories set forth in items a. to c. below (which are not intended to be a comprehensive list) are the appropriate level of disaggregation necessary to meet the disclosure objectives set forth in FASB ASC and A gaming entity may need to assess whether disaggregation should be made at a level lower than the primary revenue activities or the categories set forth in items a. to c. below. For example, a gaming entity may only generate revenues and cash flows from gaming and food and beverage services and therefore may also need to assess whether revenue should be disaggregated based on the type of gaming activity (such as table games, slot machines, sports book, etc.), or similar areas as necessary to meet the disclosure objectives. For each of the disaggregation categories, gaming entities should consider whether the disclosure would be meaningful or useful to financial statement users based on the nature of its business, as well as whether such level of detail is already frequently disclosed or discussed either internally or externally. A gaming entity s disaggregation disclosures may be aligned with its segment disclosures (for example, the gaming entity may determine segments based on geography and also determines that economic factors affecting the nature, amount, timing, and uncertainty of revenues and cash flows are closely aligned with the geography in which those revenues and cash flows are earned); however, if segments are disclosed differently, then FASB ASC requires that an entity

2 disclose sufficient information to enable users of financial statements to understand the relationship between the disclosure of disaggregated revenue and revenue information that is disclosed for each reportable segment, if the entity applies FASB Topic 280 on segment reporting. a. Geographic region. For gaming companies that have significant operations in various regions across the United States and outside of the U.S., disaggregation by geographic region may be appropriate, as the nature, amount, timing and uncertainty of revenues and cash flows is dependent on both domestic and international priorities and budgets, which may differ. Furthermore, performance and collection risk on international programs is generally more significant than on domestic programs. Because priorities and risk can also vary significantly by country depending on geopolitical and economic factors specific to those countries, disaggregating revenue solely by U.S. and international may not be as meaningful as disaggregating by geographic region. Other gaming entities may determine that the best method of disaggregating by geographic region may be through a destination vs. regional disclosure as properties in those categories tend to exhibit similar economics. b. Revenue Type. In accordance with SEC Staff Accounting Bulletin Topic 11 (L), gaming companies report significant sources of revenues on the face of the income statement by revenue type, such as Gaming, Food and Beverage, Rooms, Entertainment and Other. Significance of a revenue type is generally considered to be determined if the revenue type is 10% or greater of total revenues. FinREC believes disclosure by revenue type would generally be expected for each geographic region identified to be disclosed in accordance with 2 (a) above. c. To the extent a gaming entity has significant revenues from managing properties for third parties in addition to revenues generated at properties owned, separate disclosure of such revenues would also be expected. Refer to Example 1 for an illustrative example of the disaggregation of revenue disclosure, which incorporates the considerations set forth in this paragraph. 3. As required by FASB ASC , a disaggregation of revenue should be presented for all periods for which an income statement is presented. 4. FASB ASC indicates that the quantitative disaggregation disclosure guidance in paragraphs 5-6 of FASB ASC and paragraphs of FASB ASC is not required for entities that are neither a public business entity nor a not-for-profit entity that has issued, or is a conduit bond obligor for, securities that are traded, listed, or quoted on an exchange or an over-the-counter market. However, if an entity that is neither a public business entity nor a not-for-profit entity that has issued, or is a conduit bond obligor for, securities that are traded, listed, or quoted on an exchange or an over-the-counter market, elects not to provide those disclosures it must provide, at a minimum, revenue disaggregated according to the timing of transfer of goods or services (for example, revenue from goods or services transferred to customers at a point in time and revenue from goods or services transferred to customers over time) and qualitative information about how economic factors (such as type of customer, geographical location of customers, and type of contract) affect the nature, amount, timing, and uncertainty of revenue and cash flows. Disclosures about Performance Obligations 5. In addition to the above disclosures related to the disaggregation of revenues, a gaming entity will also have policy and qualitative disclosures necessary to help a user understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. A gaming entity should assess each of its disaggregated revenue streams and performance obligations to identify the level at which such disclosures set forth in this paragraph should be made to meet the disclosure objectives required in FASB ASC A gaming entity should assess which of the policy and qualitative disclosures are necessary to provide sufficient information to enable users of financial statements to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. Once a gaming entity determines the most appropriate level of disclosure, the gaming entity should determine whether any or all of the following disclosures are necessary: a. The nature of goods and services provided (FASB ASC (c))

3 b. Description that allows a reader of the financial statements to understand the timing and satisfaction of performance obligations (FASB ASC ) c. How a gaming entity determined whether a promised good or service was a performance obligation, including any significant judgments and estimates made during that assessment (FASB ASC ) i. Any changes in such judgments and estimates, including any judgments and estimates included in reaching the conclusions in c.ii to c.vii below (FASB ASC ). Such judgments and estimates will likely include the determination of the standalone selling prices of the performance obligations ii. The timing of satisfaction of the performance obligations (FASB ASC a) iii. The payment terms associated with performance obligations (FASB ASC b) iv. Obligations for returns, refunds, and other similar obligations (FASB ASC d), including whether there are any such provisions recorded associated with variable consideration v. Types of warranties and related obligations if any exist (FASB ASC e) vi. Disclosure indicating when cash receipt generally occurs and how this relates to the general timing of recognition vii. A description of how transaction price is allocated among performance obligations if there is more than one performance obligation in a contract with a customer (FASB ASC c) viii. Explanation of when the gaming entity expects to recognize aggregate transaction price allocated to remaining performance obligations either on a quantitative basis using the time bands that would be most appropriate for the duration of the remaining performance obligations or by using qualitative information. (FASB ASC b) 6. As discussed in paragraph of the section Definitions: The Terms Win and Gross Gaming Revenue of Chapter 6: Gaming Entities, in the AICPA Audit and Accounting Guide: Revenue Recognition, the Transaction Price in a gaming transaction is deemed to be the net amount won from or lost to the customer for the wager resulting in a transaction price that is either positive, zero or negative. Accordingly the transaction price for a gaming transaction is the difference between gaming wins and losses, not the total amount wagered. 7. Paragraph explains that combining of individual bets at a table or device as noted previously is allowed per FASB ASC , which indicates that "as a practical expedient, an entity may apply this guidance to a portfolio of contracts (or performance obligations) with similar characteristics if the entity reasonably expects that the effects on the financial statements of applying this guidance to the portfolio would not differ materially from applying this guidance to the individual contracts (or performance obligations) within that portfolio." 8. A gaming entity s revenue policy disclosures should articulate such accounting for gaming transactions. See Example 3 below for an illustration of how a gaming entity might disclose basic accounting policy information. Contract and Related Balances 9. Gaming companies typically have receivables from contracts with customers for marker balances related to gaming by a customer using credit extended to the customer by the casino and for amounts related to a customer s hotel room stay 1 at the company s properties. Liabilities of gaming entities related to revenue contracts are typically related to: advanced deposits, unpaid wagers and contract liabilities. Advanced deposits typically consist 1 Hotel receivables represent legal claims the entity has against the customer related to (1) completed hotel and food & beverage contracts which have not settled at period end through cash receipt, credit card processing or similar settlement and (2) contracts in process for which the entity has satisfied some performance obligations and has a legal claim against the customer for the amounts associated with the delivery and completion of those performance obligations. An entity will typically report and disclose these items on a combined basis as a hotel stay usually lasts for less than a week and the settlement of the receivables occurs shortly thereafter, generally within a week after the stay through credit card settlements.

4 of customer safekeeping, front money, and rooms and convention space. Unpaid wagers generally consist of outstanding Ticket In-Ticket Out ( TITO ) tickets, outstanding chip liability, and race & sports unpaid and futures. Contract liabilities are generally related to loyalty program obligations. 10. Presentation of a contract as a contract asset or a contract liability was discussed at the October 2014 FASB IASB Transition Resource Group (TRG) meeting. Paragraph 12 of TRG Agenda Ref. No. 11: October 2014 Meeting Summary of Issues Discussed and Next Steps, discussed how an entity should determine the presentation of a contract that contains multiple performance obligations: TRG members generally agreed that a contract is presented as either a contract asset or a contract liability (but not both) depending on the relationship between the entity s performance and the customer s payment. That is, the contract asset or liability is determined at the contract level and not at the performance obligation level. 11. To address the requirement to disclose the opening and closing balances of these receivables, contract assets and contract liabilities in accordance with FASB ASC (a) and provide an explanation of the significant changes in the contract asset and contract liability balances in the reporting period in accordance with FASB ASC , companies may consider disclosing a rollforward of the contract balances for the reporting period. Alternatively, companies may choose to disclose the opening and closing balances in a narrative or tabular format with enhanced narrative around the significant drivers of the changes in the balances. 12. To the extent that a gaming company chooses to present a tabular rollforward presentation of the contract balances, in order to meet the requirement to disclose revenue recognized in the reporting period that was included in the contract liability balance at the beginning of the period in accordance with FASB ASC (b), a gaming company should either separately disclose such amount or in such tabular presentation, separately break out revenue (reductions to the contract balance) into two pieces : (a) from amounts included in the beginning contract liability and (b) amounts recognized from additions within the year. Refer to Example 2 for an illustrative example of such a rollforward presentation for disclosure purposes. 13. The disclosure requirements outlined in paragraphs 8(a)-8(b) and 10 of FASB ASC relate to contract balances and changes in those balances. Such disclosure would include a qualitative description in general of the receipt of cash versus the recognition of revenue and how such matters impact the contract asset and contract liability balances. Similarly, such qualitative information should be provided as to the timing of receipt of cash versus recognition of revenue by revenue type. The disclosures would likely align with the rollforward information discussed in paragraph 12 above and would capture year-to-date information (i.e., using the periods on the comparative balance sheet), although an entity may provide supplemental quarterly information. 14. FASB ASC indicates that the disclosure requirements in paragraphs 8-10 and 12A of FASB ASC related to contract balances and certain changes impacting revenue, timing of the satisfaction of its performance obligations and explanation of the significant changes in the contract asset and liability balances during the reporting period, are not required for entities that are neither a public business entity nor a not-for-profit entity that has issued, or is a conduit bond obligor for, securities that are traded, listed, or quoted on an exchange or an over-the-counter market. However, if an entity that is neither a public business entity nor a not-for-profit entity that has issued, or is a conduit bond obligor for, securities that are traded, listed, or quoted on an exchange or an over-the-counter market elects not to provide these disclosures, the entity should provide the disclosure in FASB ASC (a), which requires the disclosure of the opening and closing balances of receivables, contract assets, and contract liabilities from contracts with customers, if not otherwise separately presented or disclosed. Other Required Disclosures 15. Since the majority of gaming transactions occur where the receipt of cash and the recognition of revenue are closely aligned, and often the remaining performance obligations of a gaming entity will relate primarily to its loyalty program, a gaming entity may provide disclosures similar to those in the table in Example 2 (inclusive of footnotes) to satisfy the disclosure requirements specified in FASB ASC Because gaming entities may not have performance obligations satisfied over time, a gaming entity should assess whether the disclosure requirements in FASB ASC are necessary to provide. In addition, because transaction prices are generally easily determinable and it may not be necessary for a gaming entity to apply

5 significant judgment to determine the amount and timing of revenue from contracts with customers, a gaming entity should assess whether the disclosure requirements in paragraphs 17 and 19 of FASB ASC are necessary to provide. To the extent that the liabilities arising from contracts with customers noted in paragraph 9 above are significant some additional disclosure considerations may apply, however, the nature of such items would likely be described previously in the disclosure around disaggregated revenue types or in the description of its performance obligations noted in paragraph 5 above. 17. FASB ASC requires that an entity disclose whether it elects to use the practical expedients in either FASB ASC (the one year or less expedient related to significant financing components) or FASB ASC (the practical expedient which allows an entity to expense the incremental costs of obtaining a contract that is one year or less). A gaming entity will need to assess whether it has significant financing components related to the issuance and collection of markers (accounts receivable from credit granted to gaming customers) to determine if such practical expedient applies. In addition, a gaming entity should assess all fees paid to websites, online travel agents, brick-and-mortar travel agents, junket operators and other similar situations where such fees are paid in advance of the actual revenue being recognized in which case the FASB ASC practical expedient may apply. 18. The descriptive disclosures of an entity s performance obligations as outlined under FASB ASC are required for all entities, but FASB ASC indicates that the disclosure requirements of paragraphs of FASB ASC related to remaining performance obligations are not required for entities that are neither a public business entity nor a not-for-profit entity that has issued, or is a conduit bond obligor for, securities that are traded, listed, or quoted on an exchange or an over-the-counter market. Promotional Allowances (Complimentaries) - Presentation and Disclosure of the Reclassification of Costs of Providing Complimentary Items to Gaming Customers 19. Prior to the adoption of FASB ASC 606, gaming entities generally reclassified the total cost incurred associated with complimentaries (such as hotel rooms and Food & Beverage) provided free of charge to a customer from the expense line of the department fulfilling the complimentary to the expense line of the department who granted the complimentary to the customer (typically the casino department). 20. As discussed in paragraph of section Promotional Allowances in the AICPA Audit and Accounting Guide: Revenue Recognition, FinREC believes historical financial statement presentations which present revenues (1) gross for goods and services that a gaming entity gives to customers as an inducement to gamble and (2) with an offsetting reduction to gross revenues for promotional allowances or complimentaries to yield net revenues, are not in accordance with FASB ASC 606. Further as illustrated in paragraphs of section Loyalty Credits and Other Discretionary Incentives (Excluding Status Benefits) and examples, the transaction price received in a gaming transaction with a customer will be allocated to the performance obligations associated with the contract arrangements with the customer and generally will result in a reduction to reported gaming revenues and an increase to other departmental revenues for the value of goods and services comped to the customer or as an increase to the loyalty program liability on the balance sheet. 21. FinREC believes that the industry s historical practice of reclassifying the total cost incurred associated with complimentaries from the expense line of the department fulfilling the complimentary to the expense line of the department who granted the complimentary to the customer, is not consistent with the treatment for the related revenue that will be reported under FASB ASC 606, whereby the allocation of revenue associated with the performance obligation related to the comp will be reflected in the department fulfilling the complimentary and not in the department who granted the complimentary to the customer. Gaming companies should ensure that costs and expenses are classified in the correct departmental line items to properly reflect the cost associated with the departmental consistent with the classification of revenue for which the cost was incurred. 22. A gaming entity should carefully consider its disclosures around complimentaries (which are treated as separate performance obligations for purposes of the allocation of the Transaction Price in a gaming revenue contract). Disclosure likely will include a description of such complimentaries, how their standalone selling price was determined, how presented, when and how recognized and the method for determining how the revenue is allocated and amounts allocated as well as quantitative disclosures by department regarding the cost of complimentaries provided consistent with the principles underlying footnote disclosures on the cost of complimentaries provided historically by gaming companies. For gaming regulatory reporting, an entity may be

6 required to reconcile the amount reported for gaming revenue in the financial statements to the amount reported to the regulator in its gaming tax filings. Examples 23. The following examples are meant to be illustrative, and the determination of the most appropriate disclosures in accordance with FASB ASC should be based on the facts and circumstances specific to an entity. Example 1: Disaggregation of Revenue Background regarding gaming entity Owns and operates casinos domestically in both Las Vegas and regional markets. Owns and operates casinos in a number of international jurisdictions (Macau, United Kingdom). Manages casinos for other entities under long-term arrangements both in the United States, which generally include a license to the gaming entity s brand. The economic environment of Las Vegas as a destination market is very different than either regional markets or its international business. Gaming entity generates revenues at each property it operates for itself (i.e. excluding Managed properties) by providing the following types of goods and services: Gaming, Food and Beverage, Rooms, Entertainment and Other. Gaming entity operates within one segment. The following illustrates a disclosure by geographic location and type of good or service: Revenue Disaggregation We are a global casino operator, manager and franchisor operating casinos domestically in both the Las Vegas and regional markets and internationally in Macau and the United Kingdom. In addition, we manage casinos for other entities in the United States under long-term agreements. We generate revenues at our owned and operated properties by providing the following types of goods and services: Gaming, Food and Beverage, Rooms, Entertainment and Other. Our revenue disaggregated by type of revenue and geographic location is as follows: For the period Ended [Month xx, 2017] Las Vegas Regional Managed International Total Gaming $ 1,000.0 $ $ 2,000.0 $ $ 4,700.0 Rooms ,250.0 Food and Beverage ,550.0 Entertainment Other $ 2,660.0 $ 1,605.0 $ 2,600.0 $ 1,905.0 $ 8,770.0 Example 2: Revenue recognized included in the contract liability balance at the beginning of the period A gaming entity provides numerous goods and services to its customers. There is often a difference between the timing of a customer paying cash to the gaming entity and the satisfaction (and subsequent recognition of revenue) of the associated performance obligations. Associated with these various goods and services, a gaming entity has concluded that its customer-related liabilities generally have two relatively homogenous categories: contract liabilities associated with its loyalty program and all other customer-related liabilities. For example, in some cases, customers will make deposits in advance of property visitation, and in other cases a customer will have items that may be converted readily into cash such as chips, tokens or a winning betting slip from a slot machine or a race and sports book. The gaming entity may choose to provide disclosure of such obligations as exhibited below: Customer-related Liabilities, Contract Assets and Capitalized Costs

7 We have two general types of liabilities related to contracts with customers: (1) our Loyalty Credit Obligation and (2) advanced payments on goods and services yet to be provided or for unpaid wagers including: deposits on rooms and convention space customer safekeeping money deposited on behalf of a customer in advance of their property visitation (often called front money ), outstanding tickets generated by slot machine play, outstanding chip liabilities, race & sports futures and unpaid winning wagers related to past race and sports wagers. Our capitalized costs generally consist of sales commissions paid to third party travel agencies in advance of the service being provided to our customer. The following table summarizes the liability activity related to contracts with customers for the reporting period: Loyalty Credit Obligation 3 Customer Advances and Other Customer- Related Liabilities Balance, beginning of period $ $ $ $ $ $ Additional amounts allocated to obligation Reductions not from beginning balance 1 (300.0) (300.0) - - (300.0) (300.0) Reductions from beginning balance 2 (325.0) (250.0) (75.0) (50.0) (400.0) (300.0) Balance, end of period $ $ $ $ $ $ Includes amounts both awarded and redeemed within the same fiscal period 2 - Loyalty Credit Obligation reductions represent amounts recognized in revenue from the balance presented at the beginning of the period. Customer Advances and Other reductions generally represent amounts returned or paid to or otherwise used by customers. 3 Loyalty credit obligations are generally satisfied as follows: 75% within one year of issuance, 15% within two years of issuance and the remainder within three years of issuance. Example 3: Accounting Policy Disclosures for a Gaming Entity Assumptions for this example The entity is a single casino with hotel and food & beverage operations. Further the gaming entity does not grant credit (issue markers) to gaming customers and wagers are not accepted on events or transactions which occur beyond the current day. The gaming entity has a simple loyalty program where a customer earns points only based on the volume of gaming play, which can be redeemed for hotel or food & beverage offerings. Customers can purchase rooms and food & beverage at the casino property for cash or through the redemption of loyalty points. For purposes of this example the gaming entity does not provide any other incentives (discretionary or non-discretionary) to customers other than the points earned in the loyalty program. The following is an example of the accounting policy disclosure this entity might make regarding its revenue recognition accounting policies. Other disclosures such as those in Example 2 would also need to be provided. Note 2 Summary of Significant Accounting Policies Revenue Recognition The Company s revenue contracts with customers consist of gaming wager, hotel room sales, and food & beverage transactions. The transaction price for a gaming wagering contract is the difference between gaming wins and losses, not the total amount wagered. The transaction price for hotel and food & beverage contracts is the net amount collected from the customer for such goods and services. Hotel and food & beverage services have been determined to be separate, stand-alone performance obligations and the transaction price for such contracts is recorded as revenue as the good or service is transferred to the customer over their stay at the

8 hotel or when the delivery is made for the food & beverage. In the case of a hotel contract involving multiple days the total transaction price of the stay is recognized on a straight-line basis as the contract for the total days of stay is non-cancellable by the customer. The Company collects advanced deposits from hotel customers for future reservations representing obligations of the Company until the room stay is provided to the customer. Gaming wager contracts involve two performance obligations for those customers earning points under the Company s loyalty program and a single performance obligation for customers who don t participate in the program. The Company applies a practical expedient by accounting for its gaming contracts on a portfolio basis as such wagers have similar characteristics and the Company reasonably expects the effects on the financial statements of applying the revenue recognition guidance to the portfolio to not differ materially from that which would result if applying the guidance to an individual wagering contract. For purposes of allocating the transaction price in a wagering contract between the wagering performance obligation and the obligation associated with the loyalty points earned, the Company allocates an amount to the loyalty point contract liability based on the stand-alone selling price of the points earned, which is determined by the value of a point that can be redeemed for a hotel room or food & beverage. An amount is allocated to the gaming wager performance obligation using the residual approach as the stand-alone price for wagers is highly variable and no set established price exists for such wagers. The allocated revenue for gaming wagers is recognized when the wagers occur as all such wagers settle immediately. The loyalty point contract liability amount is deferred and recognized as revenue when the customer redeems the points for a hotel room stay or for food & beverage and such goods or services are delivered to the customer. See Note X for additional disclosures regarding our liabilities related to advance hotel room deposits and loyalty points outstanding. Comments should be received by April 2, 2018, and sent by electronic mail to Kim Kushmerick at kim.kushmerick@aicpa-cima.com, or you can send them by mail to Kim Kushmerick, Accounting Standards, AICPA, 1211 Avenue of the Americas, NY DISCLAIMER: This publication has not been approved, disapproved or otherwise acted upon by any senior committees of, and does not represent an official position of, the American Institute of Certified Public Accountants. It is distributed with the understanding that the contributing authors and editors, and the publisher, are not rendering legal, accounting, or other professional services in this publication. If legal advice or other expert assistance is required, the services of a competent professional should be sought. Copyright 2016 by American Institute of Certified Public Accountants, Inc. New York, NY All rights reserved. For information about the procedure for requesting permission to make copies of any part of this work, please copyright@aicpa.org with your request. Otherwise, requests should be written and mailed to the Permissions Department, AICPA, 220 Leigh Farm Road, Durham, NC